Employers Have New Obligations Under Statute Regulating Noncompete Agreements
As discussed in a prior alert, newly-enacted California laws governing noncompete agreements require employer action by February 14, 2024. This alert explains the purpose of the new laws, what the notification requirement entails, and the risks of failing to comply.
It is well known that employee noncompete agreements are unenforceable in California. This rule is based on California Business & Professions Code section 16600 (“Section 16600”), which says that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Section 16600 has long been recognized to broadly prohibit noncompete clauses or agreements in any employment context, unless very limited exceptions relating to the sale of a business apply.
In 2008, in Edwards v. Arthur Andersen, the California Supreme Court applied Section 16600 to an agreement prohibiting a former employee from soliciting clients with whom he had worked at the employer. The Court concluded this agreement was “invalid because it restrained [the employee’s] ability to practice his profession.”
In a 2018 case, AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., the California Court of Appeal held that Section 16600 extended to an employee nonsolicitation provision. AMN Healthcare conflicts with a 1985 decision, Loral Corp. v. Moyes, which upheld as lawful an agreement by a departing employee not to solicit fellow employees, if limited to a reasonable period of time post-termination. AMN Healthcare was decided based on unique facts, so its general applicability is subject to debate. However, several federal courts have extended the reasoning of AMN Healthcare to common employee nonsolicitation agreements, suggesting that such agreements will be viewed as violating Section 16600. But those decisions are not binding on the state’s appellate courts.
While the courts have been expanding the reach of Section 16600, the statute itself has remained unchanged for years. This changed with AB 1076 and SB 699, which amended Section 16600 effective January 1, 2024. While Section 16600 has long rendered unlawful noncompete clauses unenforceable, AB 1076 declares it “unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement” unless the agreement satisfies one of the narrow exceptions for the sale of a business. SB699 has a similar provision, but also declares it unlawful for an employer to “attempt to enforce” a contract term that violates Section 16600. In addition, the new law imposes a notification requirement on employers.
What the New Laws Provide
Neither new enactment defines a “noncompete” clause or contract. However, AB 1076 declares unlawful “any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy an exception” in the California Business & Professions Code. AB 1076 also specifies that Section 16600 is not limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract. SB 699 prohibits any employer from attempting to enforce a contract that violates Section 16600, “regardless of whether the contract was signed and the employment was maintained outside of California.”
Read in conjunction with existing case law, these new laws will likely be interpreted to prohibit any clause or agreement that has the “effect of prohibiting” former employees from seeking or obtaining other work in California—not just agreements that expressly prohibit an employee from working for a competitor. Therefore, employers should review all employment-related agreements to determine if certain clauses have the “effect” of restraining the ability of a California employee, or a person seeking a job in California, from obtaining employment. In particular, employers should consider whether they have explicit noncompete clauses or contracts, as well as customer and employee nonsolicitation clauses or contracts.
AB 1076 and SB 699 were enacted after a series of cases recognizing that California’s prohibition against noncompete agreements only applies to post-employment restrictions. Under current case law, and as explained in Techno Lite, Inc. v. Emcod, LLC, California’s prohibition of noncompete agreements “does not affect limitations on an employee’s conduct while employed.”
AB 1076 imposes an affirmative obligation on employers to notify all employees whose contracts include any now-illegal noncompete clause that the noncompete obligation is “void.” This obligation extends as well to former employees who were employed any time after January 1, 2022. The deadline to provide this written notification is February 14, 2024.
The notice must be “a written individualized communication to the employee or former employee, and [it] shall be delivered to the last known address and the email address of the employee or former employee.” Therefore, the communication cannot be simply a mass email or employee update.
What This Means
All employers with employees in California should review their standardized employee agreements, as well as any individualized contracts with employees, to determine whether those contracts contain any “noncompete” clause that does not satisfy a statutory exception. In addition to employment agreements and confidential information agreements, such clauses might be contained in offer letters, commission agreements, stock option or stock grant documentation, bonus plans or agreements, agreements related to benefits, and severance and settlement agreements.
Based on the broad scope of Section 16600, “noncompete” clauses will likely be interpreted to go beyond express restrictions on competition. Customer solicitation restrictions are likely covered by this requirement, and employee nonsolicitation provisions may be covered as well.
If an employer has any contracts containing unlawful noncompete provisions, it should identify all employees with such contracts, including any former employees who were employed after January 1, 2022. The employer should also collect the name and date of the agreement(s) in question and the employee’s last known mailing and email addresses, and send the employee a personalized notice stating that the noncompete provision in the contract is void, before February 14, 2024. If an employee from another state moves to California, the employee should not be covered by any agreement with a prohibited clause. In that case, the employer should notify the person, upon moving to California, that any prohibited clause or covenant in a preexisting agreement is void.
In addition, employers using such provisions applicable to California employees should immediately discontinue doing so. Employers should cease attempting to enforce any unlawful noncompete provision. Employers based outside of California should note that it is a violation of the California Labor Code to attempt to avoid California’s noncompete restrictions by applying the law of another state to a contract with an employee in California.
Consequences for Noncompliance
SB 699 authorizes civil actions for actual damages, injunctive relief, and attorneys’ fees by employees or prospective employees required to sign an unlawful agreement or against whom the employer seeks to enforce such an agreement. In addition, AB 1076 states that the failure to provide the required notice by February 14, 2024, “constitutes an act of unfair competition” under California Business and Professions Code section 17200. This means that if an employee or former employee sues and prevails under this provision, the court may award the plaintiff “equitable remedies,” including injunctive relief, restitution, and civil penalties. A prevailing plaintiff potentially may also be entitled to recover attorneys’ fees. The injunction would just be an order requiring compliance with the law. Restitution could include any monetary benefit the employer received based on failing to comply with the notification requirement.
In addition, for any violation of Business & Professions Code section 17200, the State of California, any District Attorney within the State, and certain County Counsel and City Attorneys, may seek a civil penalty of up to $2,500 for “each violation.” The civil penalty is mandatory if the court finds a violation. These penalties can mount quickly, especially considering that employers typically put the same provisions in contracts with many employees. As one example of how these penalties can mount, in 2022, a California Court of Appeals approved a civil penalty award of more than $300 million based on a defendant’s inaccurate marketing communications that were held to violate Section 17200.
For additional information on AB 1076 and SB 699, contact your attorney at Quarles & Brady or: