California Strengthens Business and Professions Code Prohibiting Employee Noncompete Agreements, Other Restrictive Covenants

California Governor Gavin Newsom recently signed Senate Bill (SB) 699, which fortifies California’s restrictions on noncompete agreements as well as other restrictive covenants and provides additional protections for employees.

California has a well-established public policy in favor of employee mobility and open competition. California Business and Professions Code Section 16600 provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is void and unenforceable, subject to narrow statutory exceptions.

WHAT DOES SB 699 DO?

SB 699 will be codified as Section 16600.5 of the Business and Professions Code and will go into effect on January 1, 2024. SB 699 makes it unlawful for employers to enforce agreements that are void and unenforceable under Business and Professions Code Section 16600 regardless of where the agreement was signed or where the employee worked when the agreement was signed. SB 699 also prohibits employers from entering into a contract with an employee or prospective employee that includes a provision that is void and unenforceable under Business and Professions Code Section 16600.

As set forth in SB 699, 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 Legislature went on to explain that California has benefited significantly from its noncompete ban, fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development, stating that noncompete clauses “stifle economic development, limit firms’ ability to hire and depress innovation and growth.” The Legislature also stated that “as the market for talent has become national and remote has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.”

Importantly, the Legislature confirmed that “California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.”

SB 699 seeks to address these concerns by confirming that agreements restraining trade are void and unenforceable regardless of where and when the agreement is signed, and regardless of whether the employment was maintained outside of California. Moreover, SB 699 provides that an employee, former employee, or prospective employee may bring a private right of action for injunctive relief and/or actual damages to enforce the law. The new law specifically provides that any prevailing plaintiff in an action based on a violation of the law shall recover reasonable attorney fees and costs.

A GROWING TREND OF NONCOMPETE BANS

The enactment of SB 699 follows a growing trend of noncompete bans in states other than California. North Dakota and Oklahoma have long banned noncompetes. In May 2023, Minnesota became the fourth state banning noncompetes. In June 2023, the New York State Assembly passed a bill prohibiting employers from using noncompete agreements, and the bill is ready for New York Governor Kathy Hochul’s signature.

With respect to federal law, President Joseph Biden issued an executive order in January 2023 directing the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility,” and the FTC responded with a proposed rule prohibiting the use of noncompete clauses and preempting all state laws providing lesser protection.

CONCLUSION

In sum, SB 699 bolsters California’s prohibition on restraints of trade and expands the ways in which employees can challenge agreements void under Section 16600 by private right of action. The growing sentiment against noncompetes, both in California and across the nation, is clear, and employers based in and outside of California face greater risks when having employees sign noncompete clauses or in seeking to enforce noncompetes and other restraints on trade, including nonsolicitation of customer and employee provisions.