Paul Weiss Discusses New California Non-Compete Laws

  • California enacted two non-compete laws, Senate Bill 699 (SB 699) and Assembly Bill 1076 (AB 1076), both of which went into effect on January 1, 2024. These laws, discussed in more detail below, add new requirements and penalties to California’s existing statutory framework prohibiting restraints on trade, including employee non-compete restrictions.
  • While employment non-compete agreements have long been largely void in California, with limited exceptions, these new laws are significant in that they expand the ability of employees to challenge non-competes in California and add an affirmative notice requirement by February 14, 2024 for employers who have entered into non-compete agreements that are void under California law.

SB 699 Prohibits Employers from Entering into or Enforcing Non-Competes and Provides a Private Right of Action

SB 699 declares it a civil violation for an employer to enter into or attempt to enforce a contract that is void under California law, and provides current, former and prospective employees with a private right of action for damages, injunctive relief, and attorney’s fees and costs. An employer or former employer is prohibited from attempting to enforce a contract that is void under California law “regardless of whether the contract was signed and the employment was maintained outside of California.”  The apparent intent of this law is to permit any employee seeking employment in California to use California law to void a non-compete or similar restrictive covenant in connection with previous employment in any state, regardless of the governing law for that covenant. Because of the far reaching implications of this law, which may void agreements enforceable in other states, constitutional and other legal challenges are expected.

Additionally, it is unclear what effect SB 699 will have on California Labor Code 925, which permits a California resident employee to sign a non-compete agreement governed by non-California law if individually represented by independent counsel in connection with entering into the agreement. SB 699 does not refer to California Labor Code 925 in any way.

AB 1076 Codifies the California Supreme Court’s Interpretation of the Prohibition of Non-Competes and Adds Notice Requirement

AB 1076 codifies long-standing California case law to “void noncompete agreements in an employment context and noncompete clauses within employment contracts, even if the agreement is narrowly tailored, unless an exception applies.” It also requires employers to notify in writing current employees, and former employees who were employed after January 1, 2022, of the invalidity of any contractual non-compete clause that is void under California law. The written notification is required by February 14, 2024.

Existing California laws include statutory exceptions from the employment non-compete ban that permit non-competes in the context of a dissolution of or disassociation from a partnership/LLC or a sale of a business or an ownership interest in a business. These exceptions are not changed by AB 1076. Like SB 699, AB 1076 does not refer to California Labor Code 925 in any way. Because AB 1076 “does not constitute a change in, but is declaratory of, existing law,” AB 1076 should not have an impact on California Labor Code 925.

Further, violations of AB 1076 constitute “an act of unfair competition” and could be subject to an injunction and civil penalties of up to $2,500 for each violation, among other potential remedies.

Because AB 1076 does not define a “noncompete agreement,” open questions remain regarding the scope of the application of the new law and whether employee non-solicitation agreements would also be considered void.

Next Steps

  • Review form employment and other restrictive covenants agreements used for California employees to ensure impermissible restrictions are not included.
  • Consider whether any existing agreements may be void under California law and trigger the requirement to notify affected employees.
  • Consider including in any contract containing a restrictive covenant with a non-California choice-of-law/forum provision that applies to a California resident employee, a representation acknowledging that California Law Code 925 is satisfied because the employee was individually represented by independent counsel in entering into the agreement.
  • With respect to any employee separations occurring after January 1, 2024, anticipate that an attempt to void a non-compete agreement could be made under California law regardless of the agreement’s governing law or choice of forum and carefully consider strategic decisions to improve the likelihood of enforceability.

Other Developments

  • While non-compete clauses continue to be the focus of legislative efforts outside of California as well, the proposed sweeping ban on non-compete agreements in New York was recently vetoed by Governor Hochul. Further proposed legislation is expected.
  • The FTC’s proposed rule, announced in January 2023, remains outstanding, and it is has been reported that the FTC is expected to vote on a final rule in April 2024.

This post comes to us from Paul, Weiss, Rifkind, Wharton & Garrison LLP. It is based on the firm’s memorandum, “California Non-Compete Laws Take Effect,” dated January 26, 2024, and available here.