As our colleagues reported in this Seyfarth Shaw Legal Update, President Biden signed a comprehensive Executive Order addressing AI regulation across a wide range of industries and issues. Intellectual property is a key focus. The Order calls on the U.S. Copyright Office and U.S. Patent and Trademark Office to provide guidance on IP risks and related regulation to address emerging issues related to AI.

Patent Law

President Biden’s directive instructs the Under Secretary of Commerce for Intellectual Property and Director of the U.S. Patent and Trademark Office (USPTO), Kathi Vidal, to provide guidance on AI’s role in patent inventorship and support for patent practitioners. Specifically:

  • AI Inventorship: The Executive Order mandates the USPTO Director to publish, by the end of February 2024, guidance to the USPTO’s patent examiners and applicants addressing inventorship and the utilization of AI, including generative AI, in the inventive process. This comes amidst a backdrop where AI models currently cannot be recognized as inventors, a stance reaffirmed in the Federal Circuit decision Thaler v. Vidal. See our prior post on issues raised by Thaler.
  • Additional Guidance: Subsequent to the initial guidelines, the Executive Order requires the USPTO Director, by July 2024, to issue further guidance on other considerations “at the intersection of AI and IP.” The Executive Order further states that those other considerations might encompass support mechanisms for patent practitioners and updated guidelines on patent eligibility concerning AI innovations, if the USPTO Director “deems necessary.” It appears this guidance may shed further light on various patent eligibility issues under 35 U.S.C. § 101. See our prior post discussing some of the patentability issues for AI.
  • Support for Patent Practitioners: It’s unclear whether the guidance under AI Inventorship or the Additional Guidance will address the use of AI in the patent application drafting process.

Copyright Law

The directive also instructs the Under Secretary and Director Vidal to consult with the Director of the Copyright Office to issue guidance by July 2024, or 180 days after the Copyright Office’s forthcoming study on AI and copyright issues. These recommendations are to focus on potential executive actions related to copyright and AI. They should also address issues discussed in the Copyright Office’s study, including the scope of protection for works produced using AI and the treatment of copyrighted works in AI training. Although the Executive Order does not provide great detail, we expect guidance on:

  • AI-Generated Art: Copyright issues arise when AI systems generate art, music, or literature. If an AI creates a masterpiece, who is the rightful owner of the copyright? Is it the programmer, the entity that deployed the AI, or the AI itself? We have previously written about this issue here and here.
  • Fair Use: The Executive Order encourages data sharing and research. This might conflict with copyright laws if the data shared includes copyrighted material. Fair use and licensing agreements become significant concerns, as AI developers utilize existing datasets and copyrighted content for training and testing. We have written about lawsuits surrounding these issues here and here.
  • Commercial Use: AI technologies are widely used for content generation, such as automated news articles or product descriptions. How will copyright affect the commercial use of AI-generated content? Should AI-generated content be considered as intellectual property, and if so, who should benefit from it?
  • Orphan Works: AI has the potential to identify and restore orphaned works – copyrighted works whose owners are unknown or untraceable. This raises questions about the ownership and fair use of AI-discovered orphan works.

AI-Related IP Risk Mitigation Program

The Executive Order also contains provisions relating to AI and IP risk mitigation. In the Order, President Biden has directed the Secretary of Homeland Security, in consultation with the Attorney General, to develop a training, analysis, and evaluation program by the end of April 2024. This risk mitigation program comes against the backdrop of President Biden’s remarks on America’s need to “continue to lead on AI.” In the Department of Homeland Security’s press release regarding President Biden’s Executive Order, DHS observed, “Protecting AI intellectual property (IP) is critical to U.S. global competitiveness. IP theft threatens U.S. businesses, impacts American jobs, and negatively [a]ffects our national security.”

Many provisions of the Executive Order prioritize security concerns regarding large, cutting-edge AI models. For example, when American companies train the largest cutting-edge “foundation models,” the Executive Order requires companies to disclose “the physical and cybersecurity protections taken to assure the integrity of that training process against sophisticated threats” and also “the physical and cybersecurity measures taken to protect … model weights.” Model weights are key in the context of intellectual property disputes, because they affect how much influence input (often copyright-protected) will have on output (the subject of many ongoing lawsuits, as noted above). In an earlier announcement over the summer, the Biden Administration has called model weights “the most essential part of an AI system.”

Ultimately, the scope of “AI-related IP risks” addressed by the risk mitigation program mandated by the Executive Order extends beyond the realm of the largest foundation models, encompassing a broader range of AI-related IP challenges. The program will include dedicated personnel for collecting and analyzing reports of AI-related IP theft in a more general context. The program will also promote broad collaboration and information sharing among various federal, state, and local government agencies, including the FBI and U.S. Customs and Border Protection, as well as international organizations, with the goal of creating a more unified front against AI-related IP theft. The Executive Order also directs the development of guidance and resources for private sector actors to mitigate AI-related IP theft.

As part of the risk mitigation program, DHS will share information and best practices with AI developers and law enforcement personnel to identify incidents, inform stakeholders of legal requirements, and evaluate AI systems for IP law violations.  This last point, about evaluating AI systems for IP law violations, suggests that DHS and DOJ will also be focused on the ways in which AI systems (and the training data used by those systems) might themselves violate IP laws—a question that has already given rise to extensive litigation (see above).

The program envisioned in the Executive Order will also assist the Intellectual Property Enforcement Coordinator in updating the Joint Strategic Plan on Intellectual Property Enforcement to address AI-related issues.

On the Horizon

IP owners and those using others’ inventions and content in their business will need to keep a close watch on USPTO announcements regarding the forthcoming guidelines, which could redefine AI’s involvement in patent inventorship and provide support for patent practitioners. Inventors should also evaluate existing patent drafting processes and envisage how the integration of AI, in light of forthcoming USPTO guidelines, could augment efficiency and compliance.

On the copyright side, we may see legislative reform as Congress determines whether it needs to adapt the Copyright Act to the AI era. Defining AI as a creator, establishing new copyright ownership criteria, and creating a fair licensing framework are possible steps. Clearer guidelines on fair use of copyrighted material in AI development may also be necessary to strike a balance between encouraging innovation and respecting intellectual property rights. Meanwhile, AI developers, content creators, and copyright holders may need to negotiate licensing agreements to specify how AI-generated content can be used and who benefits from it.

We will continue to monitor these evolving issues and provide updates as we receive additional agency guidance pursuant to the Executive Order.  Be on the lookout for continued updates from us and from our colleagues across the firm as Seyfarth provides additional insight and analysis on this and other aspects of the Executive Order in the weeks and months to come. 

You can hear more about the Executive Order and other AI issues during Seyfarth’s upcoming webinar, hosted by Lexology, on November 15, 2023.

On October 12, 2023, the Wisconsin legislature introduced Assembly Bill 481, which proposes the ban of employee non-compete agreements in the Badger State. Currently, employee non-compete agreements in Wisconsin are allowed if limited to a specified territory, a specified time, and only if the “restrictions imposed are reasonably necessary for the protection of the employer or principal.” Wis. Stat. § 103.465. AB 481 would amend current law to make any post-employment non-compete agreement void, except if used to prohibit or restrict the unauthorized use of a customer list or intellectual property owned or licensed by the employer or principal.

Under existing law, non-solicitation covenants are also considered restraints on trade governed by Wis. Stat. § 103.465. See, e.g., Manitowoc Co., Inc. v. Lanning, 379 Wis. 2d 189 (2018). While AB 481 would amend Section 103.465 to address “Covenants not to compete” instead of “Restrictive covenants,” Wisconsin courts have taken an expansive view as to what types of restraints are “non-competes,” and it is possible that courts would continue to apply Section 103.465 to not only explicit non-competes, but other forms of restraints. If so, employee and customer non-solicits would be similarly limited only to protect the “unauthorized use of a customer list” or the “unauthorized use of “intellectual property.”Presumably, the proposed legislation will not affect the enforceability of restrictive covenants used in the sale of a business transaction because the legislation is targeted to “covenants not to compete in employment contracts.” However, restrictive covenants used in equity grants, severance agreements and other forms of employment-related agreements face an uncertain future.For employers in Wisconsin, while ultimate enactment of AB 481 is highly uncertain, it would not apply retroactively and no amendments of existing agreements will be necessary.We will monitor this legislation and update accordingly.

Background

On September 15th 2023, Governor Kathy Hochul signed into law an amendment to the New York Labor Law. The amendment adds a new Section 203-f to the Labor Law, which addresses the assignment of inventions made by employees. Under this law, employment agreements can no longer include provisions that assign, or provide that an employee offer to assign, any of their rights in an invention if the employee developed the invention on their own time and without the use of their employer’s resources and trade secrets. The new law exempts certain inventions, namely those that: (1) at the time the invention was conceived, related to the employer’s business or its anticipated research and development; or (2) result from work performed by the employee for the employer. On its face, SB 5640 does not appear to apply retroactively. Instead, the language suggests that invention-assignment provisions in employment agreements executed on or after September 15, 2023, are unenforceable unless they comport with the new law.

Open Questions

The new law leaves a number of open questions. Employers may wonder, what constitutes an “invention”? The statute does not define the term and courts have not yet addressed its scope and extent. Commentators are already split as to whether an “invention” is limited to patentable ideas, or whether an “invention” includes a broad scope of intellectual property rights such as trademarks or copyrightable works. Conceivably, courts may also be split, and the issue could prove to be a battleground during litigation. Another open issue is that SB 5640 does not create an express private right of action. At the very least, the law will be enforced by the New York Department of Labor. But courts may interpret the new law as permitting a private right of action as well. Given that invention agreements are also often accompanied by non-disclosure covenants, employers may face additional challenges enforcing such covenants that are coupled with a non-compliant assignment provision.

What Does this Mean for Employers?

Employers should keep several things in mind as they consider this new law. In a post-COVID world, a quantified measurement of an employee’s own time may be difficult to determine. Hybrid and remote work have blurred the lines between working hours and personal time. Courts in jurisdictions with similar laws, like California, have looked at evidence from both parties to determine an accurate timeline of an invention’s conception. Accordingly, it is important for employers to keep detailed records, log network activity, and set clear guideposts for what constitutes working time. Employers should mandate that all company work be performed on company issued devices, and establish a policy that all employee work product contained on company devices is considered company property. Employers and employees should also understand that even inventions made during an employee’s own time are assignable if it relates to the employer’s business at the time of conception or is the result of work performed by the employee specifically for the employer.

Employers should acknowledge the effects of SB 5640 and how it may impact their hiring process, as well as creativity and innovation in the workplace. Employers who require assignments during the interview process, prior to even hiring an individual, should consider the impact of this new law on those procedures. Employers should also set expectations with prospective employees about what inventions or other matters might be subject to assignment. Employers should further give thought to how the new law will affect their team’s brainstorming practices and elevation of ideas.

Conclusion

Despite some open questions, the new law clearly will require changes to some assignment provisions in employment agreements. Employers in New York or with New York offices should consider reviewing their current employment agreements that include invention or IP assignment provisions and update or create policies that require employees to disclose all inventions made or conceived by an employee prior to their employment.

This post was originally published to Seyfarth’s Gadgets, Gigabytes & Goodwill Blog.

In a recent post, we discussed whether patent applications could provide insight into the blueprints of extraterrestrial spacecraft. Yet, an enigmatic question looms large: would the powers that be genuinely consider patenting such advanced technology, fully aware that patent applications might see the light of day? Or might there be a more clandestine approach, a proverbial cloak of invisibility wielded by the men in black?

Under the Invention Secrecy Act of 1951, federal law prevents the disclosure of new technologies and inventions that may present a national security threat to the United States. Under this act, the Commissioner of the United States Patent and Trademark Office (USPTO) has the authority to highlight patent applications for scrutiny by U.S. defense departments (e.g., various three-letter and four-letter government agencies), ensuring certain innovations remain confidential. This veil of secrecy could extend to concepts and items conceived by individual civilians. Patents falling under such a secrecy directive are accessible to defense bodies, have export limitations, and are considered classified. Accordingly, the publication of such patent applications, or even the granting of a patent, could be delayed or altogether suppressed. These orders are in place to protect sensitive technologies from falling into the wrong hands. As of 2022, USPTO records show that there were 6,057 secrecy orders in effect. 

Continue Reading Cloaked in Secrecy: Can Secrecy Orders Shield Alien Innovations?

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.

Wednesday, November 15, 2023
11:00 a.m. to 12:00 p.m. Eastern
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About the Program

On Wednesday, November 15, from 11 am to 12 pm Eastern, Seyfarth and Lexology will host a Masterclass webinar titled, “AI Gone Awry: Lessons from an AI Fiasco,” and presented by Seyfarth attorneys Owen WolfeEddy Salcedo, and Jamie Anderson.

With the recent New York federal court case involving the use of ChatGPT and the AI-generated court decision citations, it is important that lawyers learn how to use AI properly as part of a legal practice and understand its strengths and weaknesses. During this webinar, the attorneys will discuss the court case and the impact of AI on the legal practice, including:

  • What went wrong for the attorneys involved in the New York case
  • Non-AI related lessons from the New York case
  • Impact of the New York case on other court cases and court rules
  • What leading AI programs currently can and cannot do as it relates to legal practice
  • Best practices for use of AI in both litigation and non-litigation settings
  • The future of AI in the legal practice

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The National Labor Relations Board moved from theory to practice in this administration’s battle against restrictive covenants. Recently, the Regional Director of Region 9 of the National Labor Relations Board filed a consolidated complaint alleging that certain restrictive covenants contained in offer letters and policies in an employee handbook violated the National Labor Relations Act. This complaint is a logical outgrowth of GC Memo 23-08, in which NLRB General Counsel Jennifer Abruzzo set out her view that “the proffer, maintenance, and enforcement” of restrictive covenants violates Section 8(a)(1) of the NLRA. Undoubtedly, this matter will serve only as the first test case, but not the last. For that reason, and because the broader non-compete landscape has shifted, employers might consider revisiting their restrictive covenants practices to mitigate risk. The complaint also serves as a reminder that employers should review their employment policies and handbooks regarding employee communications—particularly if those policies restrict communications about compensation or other terms and conditions of employment.

This complaint involves charges brought by three individuals at an aesthetics clinic that offered non-surgical cosmetic procedures. According to the complaint, the clinic maintained a number of policies that run afoul of the NLRA, including:

  • A confidentiality provision that expressly listed “salaries, bonuses, and compensation package information” in its scope;
  • An insubordination policy that prohibited disparaging statements about management or other employees;
  • A company communication policy that prohibited employees from making communications that could harm the “goodwill, brand, or business reputation” of the clinic;
  • A non-compete provision that imposed a two-year limitation on the employee’s ability to provide similar services within a 20-mile radius of the clinic, as well as a two-year limitation on customer and employee solicitation; and
  • An “Exit Agreement” that included an acknowledgment that damages for any violation of the non-compete, client non-solicit, and employee non-solicit amounted to, respectively tens of thousands of dollars in costs spent training the breaching employee (prorated under certain circumstances), $25,000 per solicited client, and $150,000 per solicited employee.

According to the complaint, several employees became dissatisfied with their work and left the company. Upon their resignations, the employer demanded that the departing employees all repay certain training costs, and the employees filed a slew of unfair labor practice charges, alleging, among other things, the maintenance of unlawful work rules. The allegations in the complaint regarding the restrictive covenants are limited to identifying the covenants and alleging that the clinic terminated one employee for refusing to sign the Exit Agreement “and to discourage employees” from engaging in concerted activity.

The Region investigated the charges, and has now issued a consolidated complaint, alleging that these restrictive covenants violate Section 8(a)(1) of the NLRA under the theory that such covenants tend to chill employees in the exercise of their Section 7 rights. The complaint also included references to several internal messages where supervisors allegedly demanded that employees refrain from discussing their compensation or their communications with management.

The Region appears to be building their argument that post-employment restrictive covenants somehow implicate Section 7 rights. To do so, Region 9 has set out an interesting first test case: as alleged in the complaint, certain of the employer’s policies seem to restrict discussions among employees relating to pay or employment conditions, which is unlawful. It’s possible that the General Counsel might leverage these allegedly unlawful policies (or other favorable facts) to extract concessions related to the clinic’s restrictive covenant program, or to argue that these policies collectively represent an unlawful limitation on employees’ Section 7 rights.

But it is unclear at this point whether the Act can be stretched to cover restrictive covenants for statutory “employees” under the National Labor Relations Act.[1] Indeed, the General Counsel only recently began to target the enforceability of restrictive covenants by way of a memorandum to the Regions. That memorandum, in turn, provides little detail regarding what legal theories (if any) grant the Board the authority to interfere with covenants that become effective only when the employment relationship between an employer and employee end. Even if the NLRB does have such authority, it bears recalling that the states have developed 50 separate bodies of law regarding their enforceability of restrictive covenants. To the extent the Board follows the General Counsel’s lead and finds the covenants at issue unlawful, the NLRB would wipe a large portion of that case law off the map (at least with respect to statutory employees).

Moreover, it’s also unclear whether the NLRB has the bandwidth and resources to litigate restrictive covenant cases. Setting aside whether the creation of two distinct bodies of law – one for supervisors excluded from the Act and one for statutory employees – makes sense, the Board has limited resources. As GC Abruzzo explained in her report to Congress last year, the Regions are already stretched thin with their current case load. Adding a whole new tranche of cases to their dockets, particularly ones that move very fast and are heavily litigated, would seem to be a bridge too far.

While we do not recommend that employers modify their restrictive covenant programs based on theoretical risk from the NLRB, this complaint is a good reminder that employers should examine whether they have legitimate business interests sufficient to support restrictive covenants under state law, especially for employees not working in a management or supervisor role. Risks are increasing for companies that universally impose broad restrictive covenants on employees, both under the NLRA and under state law.

And the decision also serves as a reminder that overbroad employee handbooks and policies regarding the confidentiality of compensation or employment conditions present significant risk where the NLRB is on much stronger statutory grounds. 

We will continue to monitor NLRB activity involving restrictive covenants, and employers with questions should reach out to their Seyfarth attorney.


[1] Most relevant to this post, the NLRA exempts supervisors from the definition of “employee.”

On September 1, 2023, California Governor Gavin Newsom signed legislation that furthers the state’s protections for employee mobility and seeks to void out of state employee non-compete agreements. Specifically, the new law 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. California Business and Professions Code Section 16600 provides “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.”

The new law goes a step further and provides in Section 16600.5 to the Business and Professions Code:

(a) Any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.

(b) An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.

(c) An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this chapter.

(d) An employer that enters into a contract that is void under this chapter or attempts to enforce a contract that is void under this chapter commits a civil violation.

(e)

(1) An employee, former employee, or prospective employee may bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages, or both.

(2) In addition to the remedies described in paragraph (1), a prevailing employee, former employee, or prospective employee in an action based on a violation of this chapter shall be entitled to recover reasonable attorney’s fees and costs.

The law is effective January 1, 2024.

The findings in support of the new legislation are:

(a) Noncompete clauses in employment contracts are extremely common in the United States. Research shows that one in five workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide. The research further shows that California employers continue to have their employees sign noncompete clauses that are clearly void and unenforceable under California law. Employers who pursue frivolous noncompete litigation has a chilling effect on employee mobility.

(b) California’s public policy provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is, to that extent, void, except under limited statutory exceptions. California has benefited significantly from this law, fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development.

(c) Over the past two decades, research on the harm of noncompete clauses and other contract clauses involving restraint of trade to pursue one’s profession has been accelerating. Empirical research shows that noncompete clauses stifle economic development, limit firms’ ability to hire and depress innovation and growth. Noncompete clauses are associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.

(d) Recent years have shown that employers utilizing broad noncompete agreements attempt to subvert this longstanding policy by requiring employees to enter void contracts that impact employment opportunities once an employee has been terminated from the existing employer. Moreover, as the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.

(e) The California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.

(f) California has a strong interest in 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. This freedom of employment is paramount to competitive business interests.

Legal commentators have previously challenged the alleged factual underpinnings of some of these “findings.” The legislation was authored and/or supported by Miravai LifeSciences, the California Employment Lawyers Association, and 46 law school professors.

Maravai LifeSciences, a supporter of this bill, explained that their “industry is heavily reliant on attracting top talent from across the country and around the world to continue driving innovation and economic growth. However, the use of noncompete clauses in employment contracts can hinder this process, preventing companies from recruiting the best candidates and limiting employee mobility. This is especially problematic in the biopharmaceutical industry, where the need for highly skilled workers with specialized knowledge is particularly acute.” Maravai further explained, the “use of noncompete clauses in employment contracts, can have a chilling effect on employee mobility and stifle economic development. Research has shown that noncompete clauses limit firms’ ability to hire and depress innovation, growth, and are associated with suppressed wages and exacerbated racial and gender pay gaps.”

While California has long separated itself from the majority of the country in its treatment of employee non-compete agreements as codified in Business and Professions Section 16600, the wrinkle in this new law is that attempts to interfere with employee non-compete agreements that may be valid under another state’s law. For example, an employee based in Florida bound by a non-compete agreement enforceable under Florida law may seek employment in California and the agreement would be considered void and enforceable under this California law. Further, an employee, former employee, or prospective employee may bring a private action to enforce the law for injunctive relief or the recovery of actual damages, or both. A prevailing employee, former employee, or prospective employee is entitled to recover attorney’s fees and costs.

The likely impact of this law is that companies may use the new California 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. Further, the shear breadth and ambiguity of the language in the new legislation puts in question whether California based employers should ask their non-California based employees to enter non-competition agreements even if they are enforceable under the laws in which the employee works or resides. In other words, while the new law seeks to protect California employers and allow them to hire out of state employees bound by non-compete agreements in California, why should those same California based employers be permitted to use non-compete agreements with out of state employees and enforce those agreements out of state. Partisan state legislators and Governors outside of California may look to punish California for this new legislation. This is yet another example of the peculiarities of California and its activist legislature and Governor which causes some out of state employers and their counsel to lose their mind.

We expect that there will be legal challenges to the legislation, including Constitutional challenges, under the commerce clause, full faith and credit clause, and potentially the contract clause.

This new law is part of the recent push to attempt to ban or reform non-compete laws, which the FTC has shown an interest in banning on a nationwide basis.

To add to the labyrinth, there is also additional proposed California legislation AB1076 that would add additional “protections” including a notification requirement for California employers.

The bill states that it would 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.”

This bill would also make 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 bill would require employers to notify current and former employees in writing by February 14, 2024, that the noncompete clause or agreement is void, as specified. This bill would make a violation of these provisions an act of unfair competition pursuant to the UCL.

In light of these developments, 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 the new legislation, and closely follow the new and proposed legislation coming out of California and any legal challenges that undoubtedly will occur.

Seyfarth partner Dawn Mertineit will be attending and presenting at the Intellectual Property Owners Association Annual Conference in Boston from September 10-12. This event brings together Intellectual Property professionals across law firms, corporations, service providers, and academia and offers educational programs, committee meetings, and networking opportunities.

Dawn will be speaking on a panel titled “Trade Secrets Under Pressure from the Winds of Public Policies.” The informational session will focus on newly enacted and proposed laws and regulations including the EU AI Act, EU Data Act, and TRIPS/WTO IP waiver, along with increasingly restrictive government policies that affect trade secrets. Dawn’s co-panelists are Kenneth Corsello from IBM and Tom Valente from the Intellectual Property Owners Association.

For more information and program registration details, visit the IPO website.

On May 11, 2011, Georgia passed the Restrictive Covenants Act, which made enforcing employee restrictive covenants far easier than it was under Georgia common law. In an odd twist, a law that Georgia intended to make it easier to enforce restrictive covenants has made it more difficult to enforce employee non-solicits. On June 13 2023, in North American Senior Benefits v. Wimmer, the Georgia Court of Appeals held that an employee non-solicit must include an express geographic restriction—a requirement that previously did not exist under Georgia’s common law regime. Employers should revise any restrictive covenant agreement accordingly to avoid a challenge to the enforceability of an employee non-solicit.

Under Georgia’s common law, the Georgia Court of Appeals squarely held that an employee non-solicit did not require a geographic or relationship-based restriction. And, even after the passage of the Restrictive Covenants Act, most employee non-solicits did not include a geographic restriction. Instead, agreements generally included a provision like the following:

During the term of Employee’s employment and for a one-year period following Employee’s separation from the Company, Employee shall not, directly or indirectly, solicit any employee of the Company to leave the Company’s employment or to join a competitive organization.

Some agreements, in a nod to the Act, added a limitation that the employee non-solicit would be limited to colleagues with whom the employee had material contact. Most agreements did not incorporate any reference to a geographic limitation—beyond a potential implied limitation based on where the company’s employees were located.

One year after Gallant, the court of appeals signaled that old Georgia law may not be the same as new Georgia law. Previously, under Georgia common law, the Court of Appeals issued a physical precedent only decision[1] where the majority opinion invalidated a customer-specific non-compete that did not include an express geographic limitation. The court of appeals reasoned that the Act required a “reference” to a geographic area limitation, and failing to include that limitation meant the restriction was void.

The decision drew a dissent from Judge Ray—now on the federal bench—who asserted that a customer-based non-compete met the statute’s geographic requirement because the covenant was limited to customers with whom the employee worked, so the “lack of a geographic area restriction is of no consequence.”

In another 2-1 decision, the court of appeals in North American Benefits expanded the geographic area requirement to employee non-solicits. The court of appeals pointed to the definition of “restrictive covenant” in the Act, which included an agreement to protect a business’s interest in confidential information, customers, and employees. Because the Act classified an employee non-solicit as a “restrictive covenant,” the employee non-solicit must be “reasonable in scope, time, and geographic limitation.” The employee non-solicit did not contain a geographic area limitation, so it was unenforceable to the extent it restricted post-employment conduct.

The court of appeals also confirmed that the Act permits a court to “blue pencil” a covenant to strike out overbroad language, but it does not authorize a court to equitably reform a covenant by revising or inserting a restriction.

Key Takeaways

Georgia employers should revise their employee non-solicits to include an express geographic area limitation. Employee non-solicits without this limitation will be found unenforceable barring an intervening decision from the Georgia Supreme Court or rehearing at the Georgia Court of Appeals. On July 17, 2023, North American Senior Benefits filed a certiorari petition with the Georgia Supreme Court, so the court of appeals’ decision may not be the last word here. But given the potential consequences if the decision stands, employers should be proactive and review their employee non-solicits and incorporate an express geographic area limitation.

Additionally, the decision serves as a reminder that restrictive covenants should be drafted in a manner that will allow a court to “blue pencil” the restriction into an enforceable form if it is found to be overbroad.


[1] In Georgia, decisions issued as “physical precedent only” are not binding precedent but are considered persuasive authority.