United States: New California Noncompete Law Amendments Take Effect This Month

Key Takeaways:

• California clarified its prohibition against noncompete covenants for California-based employees to void any such covenants that were signed outside of California, even if the parties agreed that another state's law governs the enforceability of the covenant.
• California law requires employers to provide notice by February 14, 2024 to current and former employees who were or are subject to void noncompete covenants that those covenants are void and of no further force or effect.
• Despite California's broad prohibition against noncompete covenants, employers may still enjoin an employee's tortious use of the employer's trade secrets.

California recently passed two laws amending its longstanding prohibition of employee noncompete agreements, both of which became effective this month. Section 16600 of the California Business and Professions Code voids contractual provisions restraining a CA-based person from engaging in a lawful profession, trade, or business of any kind, except under limited statutory exceptions. The amendments passed in late 2023 clarify that such provisions are void notwithstanding where those agreements were signed or the parties' choice of law designating a forum other than California. The amendments also codify existing caselaw broadly defining noncompete covenants and impose a notification requirement on employers who previously maintained unlawful noncompete covenants.

Senate Bill 699 (otherwise known as SB 699), effective January 1, 2024, amended Section 16600 to add a new Section 16600.5, which provides that "[a]ny contract that is void under this chapter is unenforceable regardless of where and when the contract was signed." The amendment codifies existing California caselaw prohibiting employers from attempting to enforce a noncompete against any employee based in California, even if the employee signed the noncompete outside of California, worked for the employer outside of California, or if the noncompete itself provides that it is subject to another state's laws. SB 699 authorizes aggrieved employees to bring a civil action against employers who violate Section 16600.5 and seek injunctive relief, recovery of actual damages, and reasonable attorneys' fees and costs.

Assembly Bill 1076 (otherwise known as AB 1076), effective January 1, 2024, codifies the California Supreme Court's decision in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), and imposes certain notification requirements upon employers who maintained void noncompete covenants. Edwards held that no form of noncompete agreement in the employment context – even one that is "narrowly tailored" – is permissible under California law, unless one of Section 16600's exceptions applies. In doing so, the California Supreme Court rejected the argument that California law permitted the enforcement of a customer non-solicitation provision. In addition, AB 1076 requires employers who maintained unlawful noncompete covenants to notify both current employees and former employees who were employed after January 1, 2022 that those clauses or agreements are void. The required notification must be a written communication, delivered to the last known address and e-mail address of the current or former employee, and must be provided no later than February 14, 2024. The amendment provides that any employer who violates the notification requirement commits an "act of unfair competition" under California law, which could result in a penalty of $2,500 per violation.

Despite the clarity the amendments bring to some aspects of California's prohibition of noncompete covenants, there remain several open questions. First, the amendments do not address the vitality of Section 925's exception to Section 16600, which permits employees who are represented by counsel in the negotiation of noncompete agreements to designate another forum's laws that may be more permissive towards restrictive covenants. Second, it remains unclear whether covenants not to solicit employees are enforceable under California law. Third, while California courts have held that covenants not to solicit customers are void under Section 16600, AB 1076 does not address whether employers must notify otherwise covered current or former employees who were subject to such covenants. AB 1076 ties its notification requirement to employers who maintained void "noncompete" agreements, not "agreements void under this chapter." Thus, it's unclear whether covenants not to solicit customers constitute "noncompete" agreements.

The amendments strengthen California's longstanding public policy against noncompete covenants. Employers, however, may be able to look to California's Uniform Trade Secrets Act (UTSA) or Unfair Competition Law (UCL) to restrain former employees from using trade secret information to solicit customers or unfairly compete. While contractual clauses restraining competition arguably run afoul of Section 16600, California courts have enjoined employees' tortious use of trade secret information as violative of the UTSA and UCL. For more information on this complex and evolving area of the law, please contact Foley Hoag's Labor and Employment group.

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