California remains on brand: New law expands restrictive covenant ban and requires notice

Last month, I posted about California’s new law (California Business and Professions Code, § 16600.1) prioritizing California’s noncompete policy above virtually every other state’s policy.

I also warned about a related bill (A.B. 1076) that would (1) mandate that section 16600 is to be read broadly and (2) require companies to notify employees subject to a covenant that violates 16600 that their restrictions are void and unenforceable. Not surprisingly, it also added penalties for failing to comply.

Well, that bill is now a reality.

On October 13, 2023 (quite appropriately, that was Friday the 13th), Governor Newsom signed the bill into law.

Both new laws go into effect on January 1, 2024, and will operate retroactively.

Note: The deadline for compliance with the notice requirement is Valentine’s Day (February 14, 2024).

The language of A.B. 1076

The new law adds subsections to existing California Business and Professions Code section 16600 and adds section 16600.1.

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).

How will this affect you?

First, the new law immediately presents 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 language also covers 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 the joint venture or exploratory period — putting aside for some time after. (Though perhaps offering little solace, while these types of B2B agreements might be void under section 16600, they may not constitute an act of unfair competition under 16600.1(c) insofar as they neither are in an employment contract nor “require an employee to enter a noncompete agreement . . . .”)

Similarly, are broad confidentiality agreements covered? Presumably if a confidentiality agreement could be interpreted to be sufficiently broad so as to constitute a noncompete (seee.g., Brown v. TGS Management Co., LLC and FTC proposed noncompete rule) it will also be covered.

Second, the new law will 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. Full stop. No employees. Nowhere. 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 new law 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 promptly come up with a plan for how to comply with the new law. For example, such companies 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. They will also need to make sure that, whatever they decide, they are still taking reasonable measures to protect their trade secrets.

From the perspective of an employee, this is obviously a boon. I expect we will see an increased number of employees fleeing (at least temporarily) to California to void their restrictive covenants. California will become even more of a clearing house for employees who live in other states, work in those other states, and enjoyed the benefits received in those other states in exchange for agreeing to a restrictive covenant enforceable in those states to flee those state, relocate to California, and thereby be relieved of their contractual obligations.

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. And I expect they will come soon, given the January 1, 2024 effective date, the retroactive operation, and the deadline of February 14, 2024 to provide notice to affected employees.

Stay tuned!

Finally, in the meantime, it is time to revisit how your company protects its confidential information (including trade secrets) and other legitimate business interests. We’ve identified many options before and will be discussing them again soon, along with additional ideas, including for example, ERISA “Top Hat Plans” with forfeiture-for-competition provisions. For now, see Noncompetes, the sky is not falling.

Additional firm resources: 

We know how hard it is to keep up with the ever-changing requirements around the country. So, to help, we have created the following resources (available for free):

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.