California law famously bans employee noncompetition agreements, under a statute enacted in 1872. As of January 1, 2024, new amendments to this age-old statute provide clarity about what is—and is not—enforceable.
California’s new Senate Bill 699 and Assembly Bill 1076, which were signed into law by Governor Newsom in October 2023, broaden the already expansive scope of California law by amending California’s Business and Professions Code Section 16600. SB 699 and AB 1076 represent, at least in part, the California legislature’s response to an increasingly remote talent market following the pandemic. According to the California legislature, California employers “increasingly face the challenge of employers outside of California attempting to prohibit the hiring of former employees”1 based on such employees being subjected to an enforceable noncompete provision in their home state. Together, these new laws make clear that California’s broad prohibition against most noncompetes also includes agreements created outside of California and create new notice obligations for employers and new enforcement rights for employees who seek to challenge an impermissible noncompete.
Notably, and as discussed more below, these new laws do not make restrictive covenants effective only during employment unlawful, nor do they affect confidentiality clauses that protect unauthorized use or disclosure of company trade secrets.
What Is Section 16600, and Why Is It Relevant to California Employers?
Section 16600 of the California Business and Professions Code voids any contract that restrains an employee from engaging in a lawful profession, trade, or business of any kind.2 California courts have interpreted this law to prohibit employers from entering into or enforcing post-employment noncompetition agreements as well as post-employment customer nonsolicitation agreements. A published California Court of Appeals decision also extended this prohibition to employee nonsolicitation covenants in 2018, and the Fifth Circuit, the Delaware Court of Chancery, and other federal courts have followed suit.3
How Do SB 699 and AB 1076 Extend Section 16600?
SB 699 and AB 1076 reflect California’s desire to preserve its own competitive business interests by “protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence.”4 SB 699 extends the reach of California law by amending Section 16600 to prohibit enforcement of a noncompete agreement that is void under California law regardless of 1) where the employee worked when entering into the agreement or 2) where the agreement was signed. In practice, unless expressly permissible under existing California law, Section 16600 prohibits any employer from enforcing a noncompete agreement against a California employee even if the noncompete agreement was entered into when the employee lived and worked outside of California. Further, SB 699 provides that current, former, or prospective employees have a private right of action to seek injunctive relief and/or actual damages against employers that enter into or attempt to enforce noncompete agreements prohibited by the law. Employees or prospective employees who prevail in such actions are also now entitled to recover attorneys’ fees and costs.
AB 1076 codifies existing California caselaw as established in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), which voids any noncompete agreement, no matter how narrowly tailored, that does not meet one of the express statutory exceptions to Section 16600.5 In addition, AB 1076 creates a new time-sensitive notice requirement for employers. Any employer who entered into a noncompete agreement with a current employee, or a former employee who was employed after January 1, 2022, must provide specific notice to any such current or former employee if the noncompete agreement does not satisfy an exception to Section 16600. Notice must be provided by February 14, 2024, and must made in an individualized, written format and delivered to the last known address and email address of the employee or former employee. A failure to provide notice under Section 16600 constitutes unfair competition under Section 17200, et seq. of the California Business and Professions Code.
How Should Employers Respond to SB 699 and AB 1076?
While AB 1076 only references “noncompete” restrictions, as noted above, California courts have long recognized that such restrictions also include customer nonsolicitation restrictions and, more recently, employee nonsolicitation provisions. Employers with employees in California should review existing agreements with employees and consult counsel to determine whether, as drafted, they are permissible and enforceable under California law and whether notice is required by February 14, 2024.
It is also important to distinguish an “in-term” restrictive covenant, which restricts competition or solicitation during employment, from a post-employment restriction. A 2020 Court of Appeals ruling held that Section 16600 does not apply to restrictions on competition during employment. (Techno Lite, Inc. v. Emcod, LLC (44 Cal.App.5th 462 (2020))). And, of course, clauses that prohibit the unlawful or disclosure of company trade secrets remain fully enforceable.
SB 699’s and AB 1076’s interstate effect may be significant for employers with remote employees working outside of California or in offices throughout the United States. Employers everywhere should work closely with employment counsel to review existing employee agreements and employment policies to ensure compliance with SB 699, AB 1076, and Section 16600. To ensure compliance with the new laws, employers should promptly do the following:
- Together with employment counsel and HR professionals, ensure that best employment practices and policies are lawful and followed, especially with respect to hiring practices. While such policies will not necessarily insulate an employer from litigation under this new law, they will help reduce potential exposure if claims are brought.
- Continue to monitor legal developments in California and other states where the employer does business to ensure compliance with applicable law.
[1] SB 699(d).
[2] Certain exceptions to Section 16600 allow such agreements including in connection with the sale of a business, the dissolution of, or disassociation from, a partnership or limited liability company, provided certain eligibility factors are met. Cal. Bus. & Prof. Code Sections 16601, 16602, 16602.5. Consequently, this should not affect restrictive covenants entered into validly in connection with a deal.
[3] AMN Healthcare, Inc. v. Aya Healthcare Servs., 28 Cal. App. 5th 923, 936 (2018) and Barker v. Insight Global, LLC, 2019 WL 176260, at *2-3 (N.D. Cal. Jan. 11, 2019).
[4] SB 699(f).
[5] See FN 2.
