New laws in California on noncompete clauses will have very broad implications and are part of a growing trend against employee restrictive covenants.
It has long been the rule that noncompete provisions in employment agreements are unenforceable in California under that state’s general prohibition against restraints of trade (CA Bus. and Prof. Code Sec. 16600). As of January 1, 2024, two new California Business and Professions Code sections make such agreements unenforceable (CA B&P Code Section 16600.5) and illegal, allowing employees to sue if they are subject to such noncompetes.
These new California laws, by their terms, are intended to be broadly applied. The limited exceptions for such restrictive covenants that are allowed in the sale or dissolution of certain entities remain, so mergers and acquisitions will remain outside the new law as between the buyer and seller. However, due diligence on a potential purchase and reverse due diligence prior to putting a company up for sale now have additional dimensions – and urgency.
The new prohibitions do not address covenants not to solicit employees, and it is possible those will be impacted by these new laws. California has for some time said that covenants against former employees soliciting customers are void. However, confidentiality clauses that protect trade secrets are still valid and enforceable in California. This would not stop a former employee from joining a competitor, but could stop a former employee from misappropriating trade secrets to gain unfair advantage. While helpful to keep in mind, lawyers know that it can be very hard to show trade secrets are threatened by former employees unless there is some hard evidence that the former employee actually took them (such as a computer file).
These new laws prohibit employers from including such clauses with employees (or prospective employees) “regardless of whether the contract was signed, and employment was maintained outside of California.” So, companies outside of California that have employees move to “The Golden State” will be subject to this new law, even when the non-compete agreement was signed outside of California and is expressly written to be governed by laws of a state other than California. In other words, companies cannot try to enforce a contract that was signed outside California with what was at the time of signing a non-California based employee. Companies with a presence in California need to be very cautious when asking a non-California employee to sign a noncompete, even employees that have a remote connection to the state.
As of January 2024, there are now fines and penalties for employers that include any prohibited non-compete clauses. Current, former and even prospective employees may bring a suit for injunctive relief to for actual damages, or both. If successful, the employee (whether current, former or prospective) is entitled to recover attorney’s fees. In some ways, these new California laws resemble suits by employees for wage and hour violations.
All companies that have a presence in or near California should take note of this development. Any company that has employees living in California that have been including any of the prohibited noncompete agreements should cease using those agreements in any form. Other companies that have been using non-compete and other restrictive agreements with employees may want to add a disclaimer that the clauses may not apply and may not be enforceable in California. Employers with ties to California that try to avoid that state’s rules in this area by selecting another state law to govern their employment or post-employment agreements (for example, in a severance agreement) now face additional risks with that strategy.
These new laws will take some time to generate court decisions that will clarify how they work in practice. Always, consult with an attorney before including any noncompete language or restrictive covenants in an employment contract, particularly if California could be involved.
