Thursday, February 29, 2024

New Year Brings Extension to California’s Ban on Noncompetes

On Sept. 1, 2023, California enacted a new law (SB 699, to be codified at Cal. Bus. & Prof. Code sec. 16600.5) that reiterates its non-compete ban contained in Section 16600 in effect on January 1, 2024.

New Section 16600.5 provides that any contract void under Section 16600 is also unenforceable, regardless of when and where the contract was signed, and an employer or former employer cannot enforce or attempt to enforcement of a contract regardless of whether the contract is signed. was signed and the work was continued outside of California. In addition, Section 16600.5 provides that (1) an employer may not enter into a contract with an employee that is void under Section 16600, (2) any employer who does so commits a civil violation (ie, it is unlawful per se to initiate an action to enforce an illegal non-compete agreement), and (3) an employee or prospective employee may bring an action to enforce this law is for injunctive relief or recovery of actual damages, or both, with attorney’s fees to prior employees, former employees, or future employees.

On Oct. 13, 2023, California also enacted a new law (AB 1076, to be codified at Cal. Bus. & Prof. Code sec. 16600.1) effective January 1, 2024 that requires employers of California employees , on February 14 . The notice must be in the form of a written individual communication to the employee or former employee, delivered to their last known address and email address. Violation of this notice provision is an act of unfair competition pursuant to California’s Unfair Competition Law, Cal. Bus. & Prof. Code sec. 17200, which provides for civil penalties.

As a background, California law voids contracts that prevent an employee from engaging in a legal profession, trade, or business of any kind. In particular, Cal. Bus. & Prof. Code sec. 16600 states, “(E)very contract by which any person is restrained from engaging in a lawful profession, trade, or business of any kind to such extent is void.” The three statutory exceptions to the prohibition against such contracts are:

  1. Restrictive covenants entered into in connection with (a) sale of business goodwill, (b) sale of owner or disposal of all ownership interests in business, or (c) sale of owner- belongs to (i) all or substantially all of the operating assets and goodwill of the business, (ii) all or substantially all of the operating assets of a division or subsidiary of the business plus the goodwill of such division or subsidiary, or (iii) ) all ownership interests in a subsidiary (Section 16601) ;
  2. Restrictive covenants entered into in connection with the dissolution of a partnership, or a partner separating from a partnership (Section 16602); and
  3. Restrictive covenants entered into in connection with the dissolution of, or termination of a member’s interest in, a limited liability company (Section 16602.5).

Courts have also carved out some limited exceptions, such as non-competes that apply during employment.

Many open questions remain about these new laws, including whether they apply to non-solicitation agreements. SB 699 refers to agreements that are “void under this chapter,” which may include prior case law holding that customer non-solicitation clauses are generally void. Additionally, while AB 1076 specifically refers to “noncompete” agreements (not agreements that are “void under this chapter”), the statute states that ”

Because of these new laws, employers should consider conducting a privilege audit of employment agreements with current and former employees employed after January 1, 2022, in California to determine the extent and legality of existing restrictive covenants. Such an audit should take into account the existence of remote work arrangements – whether intentional or unintentional. If AB 1076 notification is required, employers may need to be prepared to ensure that it is individual, in writing, and sent to the last known address and email address of each affected employee by February 14, 2024.

World Nation News Desk
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