California’s New Restrictive Covenant Law Will Impact the Technology Industry

California’s New Restrictive Covenant Law Will Impact the Technology Industry

Starting next year, a pair of new statutes will impose additional limitations on restrictive covenants in employment agreements in California.

Technology companies frequently employ employee restrictive covenants for their employees. Restrictive covenants can be used to safeguard trade secrets and protect client relationships. However, the state has long enjoyed a strong position against restrictive covenant agreements and will void agreements that seek to restrain an employee from engaging in a lawful profession, trade, or business of any kind.

California’s Business and Professions Code Section 16600, which was enacted in 1872, states, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Courts long have seen Section 16600 as prohibiting post-employment non-competition, non-solicitation of customers, and non-solicitation in employee agreements, with very limited exceptions.

As a consequence, the two new statutes will have a significant impact on the use of restrictive covenants in California. As a result, California employers, including those in the technology industry, should review any use of restrictive covenants.

Senate Bill 699

On September 1st Governor Newsom signed Senate Bill 699, a bill that bolsters that current state law that voids contracts that restrain an employee from engaging in a lawful profession, trade, or business of any kind.

The bill provides:

California’s public policy provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is, to that extent, void, except under limited statutory exceptions. California has benefited significantly from this law, fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development.

The new legislation creates Business and Professions Code § 16600.5, which restates the existing law and goes further to say that under SB 699, any contract that’s void under Section 16600 also is unenforceable, no matter where and when the contract was signed. In addition, an employer or former employer can’t try to enforce an agreement that restricts an employee’s ability to engage in a lawful profession, trade, or business— even if the contract was signed outside of California and the employment was maintained outside the state.

The California Legislature found that, despite California’s public policy in favor of employee mobility and open competition, “California employers continue to have their employees sign noncompete clauses that are clearly void and unenforceable,” and that “employers who pursue frivolous noncompete litigation has a chilling effect on employee mobility.”

The law prohibits an employer from entering into a contract with a current or prospective employee that includes non-compete clauses and other restrictive covenants that are void under Section 16600. Any employer who violates SB 699 could be liable for civil violations. Plus, SB 699 adds specific enforcement rights for employees on restrictive contracts, including the recovery of attorneys’ fees.

Assembly Bill (AB) 1076

Assembly Bill 1076 creates new Business and Professions Code Section 16600.1 and goes beyond the reach of SB 699. AB 1076 makes it unlawful to impose non-compete clauses on employees, codifying existing state case law that construes non-compete provisions as void under Section 16600 and makes non-compete provisions not just void, but unlawful.

The legislation codifies the 2008 decision of Edwards v. Arthur Andersen LLP on the prohibition on noncompete agreements being broadly construed to void such agreements and clauses in the employment context when they fail to satisfy specific exemptions. In that case, the noncompetition agreement prohibited the employee from “soliciting” any client of Andersen’s Los Angeles office for a year after his termination. The California Supreme Court rejected Andersen’s contention that it should adopt a narrow-restraint exception to Section 16600 and concluded that the company’s noncompetition agreement was invalid.

A violation of the act constitutes an act of unfair competition.

The new law includes mandatory notice requirements: employers must inform current and former employees (those employed after January 1, 2022) that any non-compete agreement or non-compete clause contained within an agreement the current or former employee signed is void unless the agreement or clause falls within one of the statutory exceptions. These notices must be provided by February 14, 2024.

Bottom Line

The two new laws going into effect January 1st mean that employees have new ways to challenge restrictive covenants in their agreements.

Until courts provide specific interpretations of these laws, employers should review their current restrictive covenants, identify any current and former employees to whom they must provide the required notice of AB 1076, revise agreements as needed, and assess any potential enforcement of existing restrictive covenants.

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