California State Senate Bill 699 (“SB 699”) and California State Assembly Bill 1076 (“AB 1076”) enhance California’s well-known prohibition against non-compete agreements or restrictive covenants. Both bills, which took effect on January 1, 2024, add additional requirements and penalties to the existing statutory framework.
Prior to passage of SB 699 and AB 1076, Business & Professions Code Section 16600 provided that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Historically, courts have interpreted Section 16600 to prohibit post-employment non-compete agreements, as well as post-employment customer non-solicitation agreements. Employers, however, have been able to enforce such agreements against former employees who worked out of state and entered into agreements that specifically agreed that another state’s laws governed the enforcement of the agreements.
SB 699 adds a new Section 16600.5 to the Business & Professions Code which specifically states that “any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.” Employers cannot enter into a contract that includes a non-compete provision that is void. Section 16600.5 further adds that an employer who either enters into a contract with a void non-compete provision or attempts to enforce such a contract commits a civil violation. Section 16600.5 creates a private right of action for an employee (and former and prospective employees) for injunctive relief, recovery of damages, and reasonable attorney’s fees and costs. Many courts had previously held that the inclusion of a restrictive covenant did not create a right of action against an employer.
AB 1076 adds Section 16600.1 which makes clear that it is unlawful to include a non-compete clause in an employment contract and that an employer cannot require an employee to enter into one that does not satisfy a statutory exception. Section 16600.1 additionally requires employers to give individualized notice to both current and former employees, who were employed after January 1, 2022, who are subject to an unlawful non-compete clause or agreement. The notices must inform the employees that their non-compete agreement or clause is void and must be received on or before February 14, 2024. Notice must be in writing and delivered to the employee’s last known mailing address and e-mail address. Failure to comply with such notice requirements constitutes an act of unfair competition under Business & Professions Code §17200 which could result in a civil penalty of $2,500 for each violation.
If you have any questions regarding the issues raised in this client alert, please contact your Labor and Employment counsel at Smith, Gambrell & Russell, LLP.