California has done it again!
We reported last month concerning California’s new non-compete law that furthers the state’s protections for employee mobility and seeks to void out of state employee non-compete agreements. Specifically, the new law, signed by Governor Newsom on September 1st, provides that any contract that is void under California law is unenforceable regardless of where and when the employee signed the contract. Under existing California law, non-compete agreements with California employees are typically void. We indicated that the likely impact is that companies may use the new law to attempt to cleanse an out of state employee from an otherwise valid non-compete agreement under another state’s law by having the employee move to California to work.
Not satisfied with this groundbreaking new law, which will likely be subject to Constitutional challenge and the ire of some California and out of state employers, the California legislature unanimously passed a second non-compete bill which Governor Newsom signed into law last week on Friday, October 13th, which is a scary additional development for employers.
The stated purpose of the new law is to codify “existing case law by specifying that the statutory provision voiding noncompete contracts is to be broadly construed to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy specified exceptions. The bill would state that this provision is declaratory of existing law. The bill would make these provisions applicable to contracts where the person being restrained is not a party to the contract.”
The new law makes it unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy specified exceptions. The new law requires employers to notify current and former employees (who were employed after January 1, 2022, whose contracts include a noncompete clause, or who were required to enter a noncompete agreement, that does not satisfy an exception to this chapter) in writing by February 14, 2024, that the noncompete clause or agreement is void. The law makes a violation of these provisions an act of unfair competition pursuant to California’s unfair competition law.
The new law provides in full as follows:
SECTION 1. Section 16600 of the Business and Professions Code is amended to read:
16600. (a) Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
(b) (1) This section shall be read broadly, in accordance with Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, to void the application of 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 this chapter.
(2) This subdivision does not constitute a change in, but is declaratory of, existing law.
(c) This section shall not be limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract.
SEC. 2. Section 16600.1 is added to the Business and Professions Code, to read:
16600.1. (a) It shall be unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy an exception in this chapter.
(b) (1) For current employees, and for former employees who were employed after January 1, 2022, whose contracts include a noncompete clause, or who were required to enter a noncompete agreement, that does not satisfy an exception to this chapter, the employer shall, by February 14, 2024, notify the employee that the noncompete clause or noncompete agreement is void.
(2) Notice made under this subdivision shall be in the form of a written individualized communication to the employee or former employee, and shall be delivered to the last known address and the email address of the employee or former employee.
(c) A violation of this section constitutes an act of unfair competition within the meaning of Chapter 5 (commencing with Section 17200).
Both new laws go into effect on January 1, 2024, and will operate retroactively as specified in the new laws.
The deadline for compliance with the notice requirement is February 14, 2024, which may be a truly delightful Valentine’s day for impacted employees.
With the impeding compliance deadline, employers will want to evaluate whether any of their agreements with California employees contain non-compete provisions or non-solicit of customer provisions, non-solicit of employee provisions/anti-raiding provisions, and overly broad confidentiality agreements which may be considered unlawful non-compete provisions, ensure that they are not using non-compete provisions with their employees, and if they are, ensure that they comply with the notification requirement under the new law.
There is also an open question as to whether these two new laws also mandate a change in the employment practices of California based employers outside of California and require that such companies not use non-competes, non-solicits, overly broad confidentiality agreements with out of state employees which may be considered unlawful non-compete provisions. In-house counsel should consult with counsel to address this perplexing issue and likely hotly litigated issue.
With respect to non-solicit of employee provisions/anti-raiding covenants, the new law indicates it shall not be limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract. So while the Edwards v. Arthur Andersen LLP decision, cited in the new statutory language, expressly did not address whether employee non-solicit provisions violate Business and Professions Code section 16600, and there is a split in authority on the continued viability of non-solicit of employee provisions in California, this statutory language indicates that such covenants may well be within its ambit, in addition to non-compete clauses, including non-solicit and no hire provisions, contained in joint venture agreements, licensing agreements, contractor agreements, staffing agreements, and other business to business agreements. While the available legislative history does not expressly mention employee non-solicit provisions, the language in the new law may be attempting to address restrictive covenants in business-to-business agreements, which the California Supreme Court held are to be analyzed under a rule of reason test rather than being declared void per se under Section 16600. The Ninth Circuit also held that employee non-solicitation provisions in business-to-business collaboration agreements are not per se violations of the Sherman Act. The interplay between these two cases and the new law remains to be seen.
In sum, in light of these two new laws, California employers should review their employment agreements, offer letters, employee handbooks, and policies and remove any non-compete provisions that may continue to exist with their California employees, consult with legal counsel concerning the implication of this law on their out of state workers, ensure that their recruiting and hiring practices take into account new legislation, put in place steps to comply with the mandated notice requirements, and closely follow any legal challenges that undoubtedly will occur.