New Noncompete Laws
New Noncompete Laws and What Is (more specifically, What Is NOT) a “Noncompete”
If you operate a business in California, you likely have some familiarity with the State’s general policies against noncompete agreements. In an effort to ensure there were no doubts about its strict stance against such agreements, SB 699 and AB 1076 were signed into law this past fall and went into effect January 1, 2024, both of which place additional burdens on employers and strengthen employee protections in the realm of regulating competition. This article will not only highlight some of the changes resulting from these two bills but will also draw a key distinction between what is and is not a noncompete agreement and how employers can still safely restrict certain competing activity among its employees.
New Noncompete Laws (Effective January 1, 2024)
What has changed under SB 699?
Noncompete agreements have routinely been deemed void under California’s Business & Professions Code Section 16600 for some time now. SB 699 was passed in part in response to the legislature’s understanding that many businesses in California still utilized noncompete agreements, despite an awareness they would be void and unenforceable, in an attempt to deter their employees from going to work for a competitor. As such SB 699 provides that any employer who enters into a contract that is void under the Business & Professions Code, or who attempts to enforce such a contract that is void under the law, commits a civil violation. The bill also enables an employee, former employee, or prospective employee to bring a private right of action to enforce the applicable provisions of the Business & Professions Code for injunctive relief, the recovery of actual damages, or both. Additionally, should the employee, former employee, or prospective employee prevail in an action based on a violation of the applicable Business & Professions Code sections, they will be entitled to recover reasonable attorney’s fees and costs.
This bill also establishes that any contract that is void under the law is unenforceable against California employees – regardless of whether the employee executed the agreement in another state or worked in another state when they executed the agreement.
What is new under AB 1076?
Under this new bill, Business & Professions Code Section 16600 now specifically provides that it be read broadly in accordance with a notable Supreme Court of California case, Edwards v. Arthur Anderson LLP (2008) 44 Cal.4th 93, to void the application of any noncompete agreement in the employment context, no matter how narrowly tailored, that does not satisfy one of the code’s exceptions.
Additionally, AB 1076 imposes new notice requirements on employers. Employers will need to notify current and former employees who were employed after January 1, 2022, and whose contracts include a noncompete clause, or who were required to enter a noncompete agreement, by February 14, 2024, that their noncompete clause or noncompete agreement is void.
From a compliance standpoint, employers can focus on determining if any notices are required among just those employees who were employed by the business between January 1, 2022, and through the present. The notice requirements do not extend to any employees who left employment by December 31, 2021, or prior to that.
What is Not a “Noncompete”?
In light of these new laws as well as California’s general stance against noncompete agreements, it is valuable to reiterate and highlight what types of employer-based restrictions are unaffected by and remain lawful restrictions on certain types competing activity.
Business & Professions Code Section 16600 has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends. However, the statute does not affect limitations on an employee’s conduct or duties while employed.
“While California law does permit an employee to seek other employment and even to make some ‘preparations to compete’ before resigning, California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ ‘undivided loyalty.’”[1]
It is worth noting that Business & Professions Code Section 16600 specifically provides that its provisions be read broadly in accordance with a notable California Supreme Court case, Edwards v. Arthur Anderson LLP[2], to void the application of any noncompete agreement in an employment context. In 2020, the 2nd District Court of Appeal in Techno Lite, Inc. v. Ecmod, LLC[3], was tasked with determining just how broadly Edwards could be read and whether it could extend to an employee’s promise not to compete with his employer while still employed. The Court in Techno Lite concluded that Edwards did not address – much less invalidate – agreements by employees not to undermine their employer’s business by secretively competing with it while being paid by the employer.
The Court went a step further and noted that it could not find a single example in which Section 16600 was held to invalidate an agreement not to compete with one’s current employer while employed by that employer. It specifically noted that the public policy behind Section 16600 is to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice and to encourage open competition and employee mobility; it is not to immunize employees who undermine their employer by competing with it while still employed.
As such, employer-based restrictions directed specifically and exclusively at ensuring employees are not competing with their employer during their employment with said employer, fall outside the intended scope of Business & Professions Code section 16600 and remain lawful restrictions employers may implement.
Employer Takeaways
Employers should review any noncompete agreements or provisions it is utilizing, or has utilized in the past, to assess whether its restrictions are targeting an employee’s post-employment activities or only restricting employee competing activity while employed.
Employers need to be more mindful than ever if they are still utilizing noncompete agreements, despite how narrowly tailored they may be. We recommend that the use of any noncompete agreements that limit an employee’s mobility or ability to work for a competitor after their employment, be discontinued.
Any employers who are still using such agreements with any current employees or used such agreements with any former employees employed between January 1, 2022, and the present, must notify said employees that their noncompete agreement or clause is void.
California employers remain free to regulate and restrict employees’ competing activities during their employment, however, employers will need to ensure any such restrictions don’t extend to or could be reasonably construed as extending to restricting the employee’s post-employment mobility.
The added obligations of SB 699 and AB 1076 do not apply to agreements or policies dealing exclusively with restricting employee competition during the employment relationship. However, if any related agreements also encompass post-employment restrictions, employers should comply with the new laws in relation to those provisions.
[1] Fowler v. Varian Associates, Inc. (1987) 196 Cal.App.3d 34, 41; Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 509
[2] Edwards v. Arthur Anderson LLP (2008) 44 Cal.4th 93
[3] Techno Lite, Inc. v. Ecmod, LLC (2020) 44 Cal.App.5th 462