Covington & Burling LLP

10/02/2023 | News release | Distributed by Public on 10/02/2023 18:49

Will California’s SB 699 Shake Up Non-Compete Law Everywhere

California non-compete law has just been shaken-up-and the ripples are likely to travel across the country. For decades and save for narrow exceptions, California Business and Professions Code § 16600 has made post-employment non-competes unenforceable due to their potential to unduly restrain an individual's business or profession. Effective January 1, 2024, however, Senate Bill 699 ("SB 699") drastically expands both the protections and the reach of California's prohibition on employee non-competes.

Specifically, SB 699:

  • prohibits an employer or former employer from even attempting to enforce a contract that is void under Section 16600;
  • grants current, former, and even prospective employees a private right of action for damages and injunctive relief-and to recover attorney's fees and costs; and
  • applies to all non-competes "regardless of where and when the contract was signed."

This is significant. Consider, for example, an individual who entered into a valid non-compete with an employer in Florida before moving to California. Under SB 699, the Florida employer could not enforce the non-compete in California courts, and, constitutional arguments aside, California courts may refuse to enforce a judgment of a Florida court against the employee. Further, if the Florida employer tries to enforce the non-compete, the employee will likely argue that SB 699 entitles the employee to an injunction, damages, and attorney's fees-which the court shall award if the employee prevails. Naturally, then, the employee's new employer too will have a strong incentive to support the employee's lawsuit. In defense of this new extraterritorial reach, the Legislature stated: "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."

There may be more. SB 699 will apply to all types of restrictive covenants that are void under Section 16600, not only post-employment non-competes. What this means in practice is unclear. So far, California courts have interpreted the existing Section 16600 to prohibit customer non-solicitation agreements and employee no-hire agreements. However, whether employee non-solicitation agreements are permissible under Section 16600 is unsettled, as courts interpreting California law on this question are split.

Will these changes apply retroactively once SB 699 goes into effect? SB 699 does not expressly address retroactivity, but it contains language ("regardless of…when the contract was signed") that litigants may try to use as a hook for applying the new law to contracts made before January 1, 2024.

In light of SB 699, employers should promptly review and update, as necessary, any employment-related agreements that may contain restrictive covenants that could expose employers to the increased enforcement power under SB 699. Employers should consult counsel before attempting to enforce a provision that could be void under the new law. Finally, employers should consider providing training to managers, HR personnel, and other individuals responsible for hiring and onboarding new employees about the expansion of California law.

Stay tuned. Employers should also be aware that a separate bill regarding employee non-competes, Assembly Bill 1076 ("AB 1076"), is currently on the governor's desk. If signed into law, AB 1076 would make it unlawful to include a non-compete clause in an employment contract or require an employee to enter into a non-compete agreement, unless a statutory exception applies. It also would require employers to provide written notification to current and certain former employees that any non-compete clause or agreement they entered into with the employer is void. We will provide further details if AB 1076 is signed into law.