Most everyone knows that employee noncompetes are void and unenforceable in California. (See California Business and Professions Code § 16600: “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.”)
So the question is: Does California’s statute and the policy behind it apply exclusively within California’s borders?
“Yes, of course it does – that’s obvious,” you say?
Well, it’s not so obvious to California.
On September 1, 2023, Governor Newsom signed into law a bill adding section 16600.5 to the California Business and Professions Code. In short, California now (expressly) thumbs its nose at all other state laws to the extent they are different.
Literally, the enabling legislation says, “California’s public policy against restraint of trade law trumps other state laws . . . .” (This does not seem to surprise California lawyers.)
In accordance with that policy statement, the new section provides as follows:
(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.
(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.
So, if there were any doubt before, it is unquestionably fair game now (well, starting January 1, 2024) for an employee who lives in another state, works in that other state, and enjoyed the benefits received in that state in exchange for agreeing to a restrictive covenant enforceable in that state to flee that state, relocate to California, and thereby be relieved of their contractual obligations. And, having thereby invalidated their contract, the employee may also be entitled to not only injunctive relief, but damages (whatever those might be) and the recovery of their legal fees.
This of course begs the question: Can the employee promptly move back to the state they fled with their contractual obligations extinguished by the move?
I will just pause to note the legislature’s findings in support of the law, which are as follows:
(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.
Many of the readers of this blog will immediately observe that the statement (upon which this new law is premised) contains multiple faulty factual assumptions, highlighting the very concern that I have been warning about for several years. For more on that, see Please Stop Using California as the Poster Child to Ban Noncompetes – Time for an Honest Policy Discussion and Correlation Does Not Imply Causation: The False Comparison of Silicon Valley and Boston’s Route 128.
While you might think that the California legislature has done enough by codifying as express state policy what was previously at least debatable jurisprudence, they seem to disagree. There is another bill making its way through the legislature that will add the following requirement:
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.
It is unclear how this will play out, given that California apparently thinks it can invalidate every contract in the country anytime an employee moves to California. If passed, will it mean that a Massachusetts company must notify any of its Massachusetts employee who resign and then move (or may move) to California that their noncompete is void?
To be clear: I am not taking a position on whether California’s ban on noncompetes is good policy or not. Rather, I am only taking issue with California’s remarkable disregard of other states’ laws and policies.