California’s Business and Professions Code (the “Code”) has long been the nation’s strictest law on restrictive covenants, essentially prohibiting employee noncompetition agreements except in limited circumstances.
Two bills recently signed into law by Governor Gavin Newsom reiterate and broaden the state’s restrictions on employee noncompetes. SB 699, which goes into effect January 1, 2024, and which we previously wrote about here, broadens the Code’s restrictions and provides individuals with new legal remedies. AB 1076 codifies existing California case law and establishes a significant notice obligation for employers.
With AB 1076’s February 14, 2024, notice deadline quickly approaching, it is vital that employers with California workforces take steps now to understand and prepare to comply with the new law.
AB 1076’s Enhanced Prohibition and Notice Requirement
AB 1076 adds a new Section 16600.1 to the Code. Beginning January 1, 2024, Section 16600.1 makes it unlawful for an employer to include a noncompete clause in an employment agreement or to require an employee to enter into a noncompete agreement. It also codifies existing case law that a violation of Section 16600 constitutes “an act of unfair competition.” In addition, Section 16600.1 also establishes a new employer notice requirement giving employers until February 14, 2024, to notify employees—both current and former employees who were employed after January 1, 2022—who are subject to an unlawful noncompete agreement or clause, that such agreement or clause is void. Importantly, these notices must be in writing, individualized, and delivered to the individual’s last known physical address and email address.
AB 1076’s Declarative Amendments
Currently, Section 16600 of the Code voids contracts that restrain an individual from engaging in a lawful profession, trade, or business of any kind unless the restriction meets one of the Code’s three statutory exceptions, i.e., restrictive covenants relating to the sale of a business or dissolution of a partnership or limited liability company. AB 1076 clarifies Section 16600 in two important ways. First, it explicitly codifies the California Supreme Court’s decision in Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937 (Cal. 2008), which held that, no matter how narrowly tailored they are, noncompete agreements and clauses are void under California law in the employment context. Second, AB 1076 confirms that Section 16600’s prohibitions apply even when the person being restrained from engaging in lawful competition is not a party to the contract at issue. Previously, there was ambiguity surrounding this issue arising from the California Supreme Court’s decision in Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130 (Cal. 2020). That ambiguity is now eliminated.
What Employers Should Do Now
- Consult with counsel regarding agreements with current and former employees to determine whether any contain provisions that may operate as noncompetes even if they do not include that term. California law is broad, and Section 16600 covers other provisions that may not be termed as a noncompete but may nevertheless be intended to restrain individuals from engaging in a lawful profession or business.
- Review and revise template offer letters, employment and proprietary information agreements, and other form agreements for California employees to ensure that they do not contain unlawful restrictive covenants. This is especially important due to the enactment of SB 699, which adds Section 16600.5 to the Code, entitling plaintiffs to actual damages and attorneys’ fees for being subject to any unlawful noncompete provision or restrictive covenant in violation of Section 16600.
- Identify any current employees or former employees who were employed after January 1, 2022, who may be subject to an unlawful restrictive covenant. These would include:
- current and former employees who are or were working remotely and residing in California, even if the employer had no physical offices in California, and
- former employees who may have never worked in California during their employment but have since moved to California.
- As to any employees who are entitled to notice, work with counsel to draft a compliant notice for affected individuals.
- Establish a procedure and designate and train the personnel who will be responsible for providing the required notice by the February 14, 2024, deadline.
- Establish a document retention policy for retaining records documenting compliance with AB 1076’s notice requirements, including a copy of the notice, the date it was sent, and the physical and email addresses to which it was sent.
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