On September 1, 2023, California Governor Gavin Newsom signed legislation that furthers the state’s protections for employee mobility and seeks to void out of state employee non-compete agreements. Specifically, the new law provides that any contract that is void under California law is unenforceable regardless of where and when the employee signed the contract.
Under existing California law, non-compete agreements with California employees are typically void. California Business and Professions Code Section 16600 provides “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
The new law goes a step further and provides in Section 16600.5 to the Business and Professions Code:
(a) Any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.
(b) An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.
(c) An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this chapter.
(d) An employer that enters into a contract that is void under this chapter or attempts to enforce a contract that is void under this chapter commits a civil violation.
(1) 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.
(2) In addition to the remedies described in paragraph (1), a prevailing employee, former employee, or prospective employee in an action based on a violation of this chapter shall be entitled to recover reasonable attorney’s fees and costs.
The law is effective January 1, 2024.
The findings in support of the new legislation are:
(a) Noncompete clauses in employment contracts are extremely common in the United States. Research shows that one in five workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide. The research further shows that California employers continue to have their employees sign noncompete clauses that are clearly void and unenforceable under California law. Employers who pursue frivolous noncompete litigation has a chilling effect on employee mobility.
(b) 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.
(c) Over the past two decades, research on the harm of noncompete clauses and other contract clauses involving restraint of trade to pursue one’s profession has been accelerating. Empirical research shows that noncompete clauses stifle economic development, limit firms’ ability to hire and depress innovation and growth. Noncompete clauses are associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.
(d) Recent years have shown that employers utilizing broad noncompete agreements attempt to subvert this longstanding policy by requiring employees to enter void contracts that impact employment opportunities once an employee has been terminated from the existing employer. Moreover, as the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.
(e) The 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.
(f) California has a strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence. This freedom of employment is paramount to competitive business interests.
Legal commentators have previously challenged the alleged factual underpinnings of some of these “findings.” The legislation was author sponsored and supported by Miravai LifeSciences, the California Employment Lawyers Association, and 46 law school professors.
Maravai LifeSciences, a supporter of this bill, explained that their “industry is heavily reliant on attracting top talent from across the country and around the world to continue driving innovation and economic growth. However, the use of noncompete clauses in employment contracts can hinder this process, preventing companies from recruiting the best candidates and limiting employee mobility. This is especially problematic in the biopharmaceutical industry, where the need for highly skilled workers with specialized knowledge is particularly acute.” Maravai further explained, the “use of noncompete clauses in employment contracts, can have a chilling effect on employee mobility and stifle economic development. Research has shown that noncompete clauses limit firms’ ability to hire and depress innovation, growth, and are associated with suppressed wages and exacerbated racial and gender pay gaps.”
While California has long separated itself from the majority of the country in its treatment of employee non-compete agreements as codified in Business and Professions Section 16600, the wrinkle in this new law is that attempts to interfere with employee non-compete agreements that may be valid under another state’s law. For example, an employee based in Florida bound by a non-compete agreement enforceable under Florida law may seek employment in California and the agreement would be considered void and enforceable under this California law. Further, an employee, former employee, or prospective employee may bring a private action to enforce the law for injunctive relief or the recovery of actual damages, or both. A prevailing employee, former employee, or prospective employee is entitled to recover attorney’s fees and costs.
The likely impact of this law is that companies may use the new California law to attempt to cleanse an out of state employee from an otherwise valid non-compete agreement under another state’s law by having the employee move to California to work. Further, the shear breadth and ambiguity of the language in the new legislation puts in question whether California based employers should ask their non-California based employees to enter non-competition agreements even if they are enforceable under the laws in which the employee works or resides. In other words, while the new law seeks to protect California employers and allow them to hire out of state employees bound by non-compete agreements in California, why should those same California based employers be permitted to use non-compete agreements with out of state employees and enforce those agreements out of state. Partisan state legislators and Governors outside of California may look to punish California for this new legislation. This is yet another example of the peculiarities of California and its activist legislature and Governor which causes some out of state employers and their counsel to lose their mind.
We expect that there will be legal challenges to the legislation, including Constitutional challenges, under the commerce clause, full faith and credit clause, and potentially the contract clause.
This new law is part of the recent push to attempt to ban or reform non-compete laws, which the FTC has shown an interest in banning on a nationwide basis.
To add to the labyrinth, there is also additional proposed California legislation AB1076 that would add additional “protections” including a notification requirement for California employers.
The bill states that it would codify “existing case law by specifying that the statutory provision voiding noncompete contracts is to be broadly construed to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy specified exceptions. The bill would state that this provision is declaratory of existing law. The bill would make these provisions applicable to contracts where the person being restrained is not a party to the contract.”
This bill would also make it unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy specified exceptions. The bill would require employers to notify current and former employees in writing by February 14, 2024, that the noncompete clause or agreement is void, as specified. This bill would make a violation of these provisions an act of unfair competition pursuant to the UCL.
In light of these developments, California employers should review their employment agreements, offer letters, employee handbooks, and policies and remove any non-compete provisions that may continue to exist with their California employees, consult with legal counsel concerning the implication of this law on their out of state workers, ensure that their recruiting and hiring practices take into account the new legislation, and closely follow the new and proposed legislation coming out of California and any legal challenges that undoubtedly will occur.