Did California Defeat the Non-compete?

It has been a longstanding rule that California will not enforce non-compete agreements. Specifically, California’s Business and Professions Code (CBPC) Section 16600 invalidates “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” with limited exceptions for restrictions related to the sale of a business, dissolution of a partnership, or dissolution or termination of an interest in a limited liability company.

While California’s employers may not have embraced the state’s stance, they understood it and honored it. But when the California Senate and Assembly recently enacted new laws to change the state’s restrictions on non-competes, California employers advocated against them.

Employers that do not operate in California may not initially be concerned. What they may not realize is that if the courts uphold the recent California laws, then California has the ability to invalidate any non-compete agreement that an employer signs with an employee.

What Is in the New Laws

Effective October 13, 2023, California Assembly Bill 1076, signed by Governor Gavin Newsom, amends the CBPC to codify that non-compete agreements and non-compete clauses in an employment contract are void, no matter how narrowly they’re tailored. Additionally, the amendment requires that, as of February 14, 2024, employers must contact any current or former employees whom they employed at any point after January 1, 2022, and who have contracts containing a non-compete clause that the CBPC prohibits, to notify them that the non-compete clause is void. This notification must be presented in writing and delivered to the employee’s last known address and email address. If an employer fails to provide this notification, then the amendment deems this failure a violation of California’s Unfair Competition Law and subjects the employer to potential civil penalties, which may be up to $2,500 per violation.

Governor Newsom also signed California Senate Bill 699, which took effect on January 1, 2024. The Senate bill further amended the CPBC by adding Section 16600.5, which clarifies that California’s existing law prohibits non-competition covenants, regardless of where or when the California resident signed the non-compete agreement, and even prohibiting agreements that a California resident signed while residing in another state. Additionally, it classifies an employer’s actions of entering a non-compete or attempting to enforce a non-compete as civil violations. And it grants former and prospective employees a private cause of action against the employer with the ability to seek injunctive relief, actual damages, and attorney’s fees and costs.

What Does This Mean?

In short, these new laws mean not only that employers cannot enter non-compete agreements with employees who reside in California, but also that they cannot enforce non-compete agreements against former employees who move to California. This is significant because the laws, as written, mean that an employee can negotiate an agreement with an employer in a state in which a non-compete agreement is valid and enforceable, then move to California—literally the next day in a remote work situation, or after the termination of the employment relationship—and the employer will not have the ability to enforce the non-compete. Moreover, if the employer attempts to enforce the non-compete, the former employee can sue the employer.

So, what this really means is that California has passed legislation that can unilaterally invalidate any non-compete between an employer and employee, regardless of when the employee moves to California. If you think about it, this is an excellent way for California to recruit top talent!

What Employers Should Not Do

Regardless of whether a business currently operates in California or has employees in California, it should not ignore this rule. Employers should have their legal and HR teams partnering to make sure they send out notices before February 14, 2024, to all employees who are California residents, informing them that the employer cannot enforce any non-compete clause to which they agreed. Employers should also review their templates for employment agreements, including offer letters and confidentiality agreements, to remove any non-compete provisions for future California employees, as well as to remove any non-compete agreements from California residents’ employment agreement process.

Additionally, and perhaps not as obvious, employers should review their antitrust provisions and training to ensure that they have clear provisions which prohibit employees from speaking to competitors about HR practices that could restrict employees’ ability to change employment without restrictions. Stated plainly, employers cannot agree not to hire one another’s employees to constrain employees’ movement between competitors.

What Employers Can Do

Although they cannot prevent former employees from moving to California after the termination of the employment relationship, employers should consider whether they need to hire California residents. For employers located in California, changing locations may not be an option. However, employers that have remote workers can restrict hiring in California and can require, as a condition of continued employment, that employees receive approval if they plan to relocate to California.

Employers can also establish direct consideration related to their non-compete agreements. Many states already require that employers pay consideration for non-compete agreements. Employers should ensure that they are stating the provisions clearly so that if an employee later moves to California, thus negating the non-compete, the employer can require the employee to tender any consideration the employee received in exchange for the non-compete.

Employers should also review their confidentiality and non-disclosure agreements (NDAs). The underlying purpose of non-competes is generally to protect the employer’s confidential and proprietary information. Employers should review their processes to ensure not only that they have valid agreements with employees, but also that they have a robust system for identifying the sensitivity classification for information. NDAs should focus on limiting the distribution, access, and ability to transfer certain sensitive types of information.

Employers should also understand the applicability of the Uniform Trade Secrets Acts and similar laws and regulations. If an employer’s competitor intentionally seeks to recruit the employer’s talent, the employer might consider whether the competitor is attempting to interfere with a contractual relationship or whether the employees in question would violate their duty of confidentiality or trade secrets laws were they to perform the functions of a role in the competitor’s organization.

Perhaps the main—and most important—action an employer can take is to make sure to create an environment in which employees want to work. This happens not just through the compensation structure, but across the overall work environment.

See also:

• Coming Soon: A Nationwide Ban on Non-compete Agreements?
• Non-compete Ban Would Force Companies to Become Smarter About Data-Loss Strategies

Angelique Strong Marks serves as chief legal officer for Cars.com Inc. d/b/a Cars Commerce. In this role, she is responsible for the company’s legal corporate governance, compliance, and information security and data privacy matters. Cars Commerce appointed Marks to this role in April 2022. Prior to joining the company, Marks served as general counsel at REE Automotive, where she was part of the core team that successfully established REE as a publicly traded company. She also served as general counsel at MAHLE Industries and Behr America, global suppliers to the automotive industry. Marks holds a J.D. from the Ohio State University, an MBA from Miami University, and a BS from the University of Akron.

From: Corporate Counsel