California Expands Prohibitions on Noncompete Restrictions

It is settled law in California that contracts in which a party is “restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” [Bus. & Prof. Code Section 16600.] The three narrow exceptions to this restriction on noncompete agreements are (a) sellers in the sale of a business, (b) the dissolution of a partnership, and (c) the dissolution or termination of interests in a limited liability company.  Two new laws effective January 1, 2024 are set to further restrict the use of noncompete restrictions.

Under Senate Bill 699, which will be codified in Bus. & Prof. Code Section 16600.5, an out-of-state employer is restricted from imposing the noncompete laws of another jurisdiction on its California employees, regardless of where the contract was signed or where the employee worked when he or she signed the contract.  The new law, which is designed to restrain employers from side-stepping California’s protections on California employees, provides for civil remedies, including damages and attorneys’ fees.  There remains some question on whether the new law can withstand scrutiny, as it seeks to restrain trade outside of the boundaries of California.  There is also a question as to whether the new law can be imposed retroactively.  There will likely be cases filed in 2024 that will seek to clarify these issues.

Under Assembly Bill 1076, to be codified in Bus. & Prof. Code Section 16600.1, the legislature is making it crystal clear that noncompete restrictions, even narrowly tailored ones, in employment agreements are not enforceable in California.  This new law seeks to codify the 2008 decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937.  Not only are such restrictions prohibited (outside of the limited exceptions discussed above), but employers who entered into such agreements after January 1, 2022 must notify the applicable employees, in writing, by February 14, 2024 to inform them that such restrictions are not enforceable.

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