New Law Broadens Reach of California’s Non-Compete Restrictions to Those Signed Out of State

New Law Broadens Reach of California’s Non-Compete Restrictions to Those Signed Out of State

On September 1, 2023, Governor Newsom signed Senate Bill (SB) 699, which enhances the current state law that voids contracts that restrain an employee from engaging in a lawful profession, trade, or business.

A report from the chief counsel of the state Assembly Judiciary Committee noted that non-compete agreements—contracts that prohibit someone from engaging in competition against the employer—affect nearly 20% of workers nationwide, with roughly 30 to 46% of workers in the private sector being subject to such an agreement.

California SB 699 states:

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.

This new law creates a private right of action for employees whose agreements include restrictive covenants. The legislation also provides for attorney fees for any current, former, or prospective employee who successfully brings suit against an employer’s use of those restrictive covenants.

California’s Business and Professions Code section 16600 provides:

[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” This section has long been interpreted by California courts as prohibiting post-employment noncompetition, non-solicitation of customers, and non-solicitation of employee agreements, with few exceptions. The chapter exempts such restrictive covenants in the sale or dissolution of corporations, partnerships, and limited liability corporations.

Contracts Signed Outside of California

Significantly, SB 699 restates the existing law, but also goes further. Under the new legislation, any contract that’s void under section 16600 is unenforceable, no matter where and when the contract was signed. Moreover, an employer or former employer is prohibited from enforcing 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 of California.

As mentioned above, a new Section 16600.5 states that an employee, former employee, or prospective employee may bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages, or both.

SB 699 also prohibits an employer from entering into a contract with an employee or prospective employee which includes noncompete clauses and other restrictive covenants that are void under section 16600.

Bottom Line

This is an important change to California employment law. Any contract that is void under section 16600 is unenforceable, regardless of where and when the contract was signed.

This bill adds explicit enforcement rights for employees concerning restrictive contracts. The new law takes effect on January 1, 2024, and subjects employers to liability for any violations.

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