As I posted a few weeks ago, California passed a law prioritizing its noncompete policy above virtually every other state’s policy. Specifically, the new law adds section § 16600.5 to the California Business and Professions Code, making it clear that California employers cannot use noncompetes with any of their employees — regardless of where the employees may be located — and invalidating any contracts entered into by an employee who lives in or flees to California.
In that post, I noted that another anti-noncompete, anti-nonsolicit bill was making its way through the California legislature.
Well, that bill (A.B. 1076) is now on the Governor’s desk.
The bill essentially says that section 16600 is to be read broadly and that companies will need to notify employees subject to a covenant that violates 16600 that those restrictions are void and unenforceable.
And, not surprisingly, there are penalties for failing to comply.
The Language of the Bill
The bill 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).
How will this affect companies and employees?
First, we will have to wait and see if Governor Newsom signs the bill.
I am betting he will. (I believe he has until October 13, 2023 to decide.)
Second, assuming he does sign it, the new law will immediately present a threshold question: What agreements, in addition to noncompetes and nonsolicitation covenants, are covered?
For example, are no-recruit agreements prohibited? Currently, the law is unsettled. But the following language suggests that no-recruit agreements will likely be prohibited going forward:
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.
(Emphasis added.)
Presumably this would also cover many other agreements. For example, joint venture agreements and confidentiality agreements in connection with a possible merger or acquisition, where the companies agree not to hire the other party’s employees during — putting aside for some time after — the joint venture or exploratory period.
Similarly, is a broad confidentiality agreement covered? Presumably if the confidentiality agreement could be interpreted to be sufficiently broad so as to constitute a noncompete (see, e.g., Brown v. TGS Management Co., LLC and FTC proposed noncompete rule) it will also be covered.
Note that when the new law (or laws) go into effect, which will be on January 1, 2024, they will operate retroactively. So, restrictive covenants already in place will need to be dealt with promptly.
Third, if signed, the law would impact different companies and employees differently.
From the perspective of a company that is incorporated or headquartered in California, there is an argument that the company simply cannot use noncompetes, nonsolicits, no-recruits, broad nondisclosure agreements, or other agreements that might violate the new law with anyone. No employees. Anywhere. To the extent that the company is using any of these restrictive covenants, it will need to take steps to promptly undo those agreements and notify affected employees (and others who they may have such agreements with).
From the perspective of a company outside of California with employees in California, the bill, if it passes, can still be an issue. Companies with California employees who have noncompetes or nonsolicits — and likely no-recruits and broad nondisclosure agreement — will need to come up with a plan for how to comply with the new law. For example, they will need to consider whether to send notices at all and, if so, which employees they will send notices to. And they will need to consider whether and how to address no-recruit agreements and confidentiality agreements.
From the perspective of an employee, this is obviously a potential boon. I expect we’ll see an increased number of employees fleeing (at least temporarily) to California to void their restrictive covenants.
We will have to see how this all plays out, but I fully expect that there will be plenty of legal challenges to the law.
Stay tuned!
Additional firm resources:
We know how hard it is to keep up with the ever-changing requirements around the country. But we do. So, to help, we have created the following resources (available for free):
- 50-State Noncompete Law Chart, the first of its kind and regularly updated (downloadable PDF of the chart);
- Chart of Noncompete “Low-Wage” Thresholds and Criteria (downloadable chart);
- Notice requirements summary chart, providing details for each of the 8 states (plus D.C.) that has notice requirements related to noncompetes (downloadable PDF of the chart);
- 50-State and Federal Trade Secret Law Chart, providing a comparison of the trade secrets laws nationally to the Uniform Trade Secrets Act (downloadable PDF of the chart).
- “Changing Trade Secrets | Noncompete Laws” (dedicated blog page) now provides a current detailed summary of the changing landscape of trade secret laws and noncompete laws around the country, state by state and at the federal level;
- Trade secret and other legitimate business interest protection plan strategy and checklist; and
- Ten Minute Trade Secret Training Series, currently with three training videos and one “basics” video:
We hope you find all of these resources useful.
More are coming.
And please note that we are grateful for all of the input we’ve received over the years, and we welcome any suggestions for improvements that you may be willing to share.
*A huge thank you to Erika Hahn for all of her extraordinary help in tracking and monitoring all of the bills around the country and helping me make sure that all of our resources are current and accurate.