California’s Noncompete Law Has Immediate Effects for Business

California usually takes the lead in the nation’s legislative landscape, especially when it comes to noncompete laws, and recent developments are no exception.

Attempts to ban noncompete agreements nationwide have encountered setbacks. New York’s governor vetoed a legislative ban on noncompete agreements. The Federal Trade Commission’s similar rule ran into strong resistance from industry groups, who claimed the FTC overstepped its statutory authority and threatened to sue.

In sharp contrast, California passed two laws in 2023— Assembly Bill 1076 and Senate Bill 699—to reinforce its long-standing opposition to noncompetes, which prevent employees from finding new employment opportunities in a similar line of work or establishing a competing business after leaving an employer. California’s new noncompete laws reach far beyond state lines, impacting any company with employees in California.

Assembly Bill 1076

Assembly Bill 1076 codifies existing California case law, rendering unenforceable any noncompete in the employment context, no matter how narrowly tailored, except in case of sale or dissolution of a business.

The new law emphasizes that the prohibition on noncompetes should be interpreted broadly in accordance with Edwards v. Arthur Andersen LLP. The Edwards court invalidated both the noncompete provision and the customer nonsolicitation provision.

The court viewed the nonsolicitation provision as anti-competitive and said a company should only be allowed to protect its trade secrets or confidential proprietary information.

However, the court didn’t reach the issue of the validity of the “nonsolicitation of employee” clauses, known as the “no-raiding” clause, prohibiting attempts to hire company employees after leaving the company.

As a result, the no-raiding clause’s legal status remains undetermined, further compounded by historically inconsistent court rulings on their enforceability. In Loral Corp. v. Moyes, the no-raiding clauses were upheld as reasonable restraints on trade.

However, in AMN Healthcare, Inc. v. Aya Healthcare Servs, the California Court of Appeals invalidated a similar clause because of its impact on the plaintiffs’ profession as recruiters. In Barker v. Insight Global, LLC, a federal court in the Northern District defied precedent, striking down a nonsolicitation provision under California law despite earlier rulings.

In addition, AB 1076 requires employers to notify certain current and former employees by Feb. 14 if all the following apply:

• The employees are located in California
• They were employed by the company after Jan. 1, 2022
• Their employment agreements contain a noncompete, customer nonsolicitation, or similar unenforceable provision under California law

A company’s violation of AB 1076 constitutes an act of unfair competition under the Unfair Competition Law, and offenders will face a civil penalty of up to $2,500 for each individual violation.

Senate Bill 699

Effective January 2024, Senate Bill 699 amends the California Business & Professions Code by adding new Section 16600.5. It renders any contract with restraint on trade unenforceable, regardless where and when the contract was signed, or whether the agreement was signed and employment was established outside California.

In other words, an employment agreement with a noncompete provision that’s otherwise enforceable under different state laws would become invalid when the employee moves into California.

SB 699 also grants employees, former employees, and applicants the authority to seek damages, injunctive relief, and attorneys’ fees when successfully challenging and invalidating restrictive covenants. However, unlike employees, employers won’t be eligible for similar benefits if they prevail in the legal dispute.

This new law exposes employers to more significant risk of lawsuits than ever before. Employees may have more to gain financially, while employers could incur costs defending against lawsuits, even if they win.

Legal Strategies

With enactment of AB 1076 and SB 699, which apply to any company with current or former employees located in California, regardless if the company is incorporated or headquartered in California or has an office there, affected companies should consider taking the following steps.

Review all employment agreements with current and former California employees hired after Jan. 1, 2022, including those who relocated to California, to determine if they contain noncompete or customer nonsolicitation provisions unrelated to sale or dissolution of a business.

If required under AB 1076, send a written notice to relevant employees by Feb. 14. Such notice should affirm your company’s commitment that your company won’t attempt to enforce any agreement or provision of any agreement to the extent deemed unenforceable under California law.

Assess whether offer letters or employee handbooks create implied contracts containing restrictive covenants, such as non-compete and non-solicitation, and if sending notices under AB 1076 is necessary.

Review your company’s employment agreement template with California employees to remove noncompete or customer solicitation provisions. To be prudent, you should also remove the no-raiding provision from the template due to its uncertain legal validity and employees’ newly gained power under SB 699 to seek damages unless a no-raiding provision is crucial for the company.

Require all employees who have signed agreements with noncompete or nonsolicitation provisions to notify the company’s HR team if they move to California. If that occurs, the company should sign an amendment removing those provisions.

Review the NDA template to ensure the confidentiality and trade secret provisions are strong enough to protect the company’s interests if employees join the company’s competitors.

Companies need to act quickly to ensure compliance before the quickly approaching Feb. 14 deadline.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lena Kempe is principal attorney at LK Law Firm, specializing in AI, IT, IP, privacy, cybersecurity, and employment law.

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