By: Dana J. Finberg & Matthew C. Sgnilek

In September and October of this year, California Gov. Gavin Newsom signed into law two bills expanding California’s restrictive covenant law. The two new laws go into effect on Jan. 1, 2024, and will operate retroactively.

California has long been hostile territory for post-employment restrictive covenants. Covenants not to compete have been banned since 1872, and that prohibition is codified in Section 16600 of the California Business and Professions Code. Some courts had interpreted Section 16600 as making illegal only “those restraints which preclude one from engaging in a lawful profession, trade, or business,” but permitting restrictive covenants “where one is barred from pursuing only a small or limited part of the business, trade or profession.” This interpretation is generally referred to as the narrow restraint doctrine. California courts also developed a trade secret exception to Section 16600, under which a non-compete or non-solicitation clause may be valid under Section 16600 if it is necessary to protect an employer’s trade secret.

In 2009, in Edwards v. Arthur Andersen LLP, the California Supreme Court rejected the narrow restraint doctrine (and made it clear that the ban applied not only to covenants not to compete, but to non-solicitation of clients as well). The Edwards Court explicitly declined to address the so-called trade secret exception to Section 16600, which has led to a conflicting body of law and spirited debate over whether the trade secret exception survived Edwards. As a practical matter, however, even those California courts finding that the trade secret exception survived Edwards have applied it exceedingly narrowly.

One of the new laws signed by Governor Newson last month — A.B. 1076 — changes California’s noncompete statute in several significant ways that companies with California employees need to be aware of and react to.

First, A.B. 1076 mandates that Section 16600 is amended to read that “[t]his section shall be read broadly, in accordance with Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 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 an exception in this chapter.” Of course, this begs the question: what exceptions survive Edwards and A.B. 1076? Post-Edwards, California courts have upheld the enforceability of noncompete agreements entered into by the seller of a business or by a member or partner of a business, so it appears that this exception will survive. But it is an open question whether the trade secret exception – which the Edwards Court declined to address, leading to conflicting judicial decisions – will “satisfy an exemption” to amended Section 16600.

Second, A.B. 1076 adds a new Section 16600.1 to the California Business and Professions Code. Section 16600.1 (a) provides that “[i]t shall be unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy an exception in this chapter.” But wait, there’s more…

Third, new Section 16600.1(b) requires companies to notify employees subject to a covenant that violates Section 16600 that their restrictions are void. This notice must be sent by no later than February 14, 2024, and it must be sent to current employees and to former employees who were employed after January 1, 2022. The notice must be “in the form of a written individualized communication to the employee or former employee, and shall be delivered to the last known address and the email address of the employee or former employee.” But wait, it gets even better…

Fourth, new Section 16600.1(c) states that “[a] violation of this section constitutes an act of unfair competition within the meaning of Chapter 5 (commencing with Section 17200).” So, Section 16600.1 not only renders noncompete agreements (which do not satisfy an exception surviving Edwards) unenforceable, it makes their use unlawful and a violation of California’s unfair competition laws. Moreover, a failure to provide the notice required by new Section 16600.1(b) will also be considered an act of unfair competition under Section 16600.1(c). Under those unfair competition laws, violators may be subject to enforcement actions by the attorney general or other local agency attorneys and/or a private right of action for injunctive relief or restitution.

Companies with California employees cannot circumvent A.B. 1076 by attempting to bind those employees to contracts stating that they are construed under the laws of a different state. That is because the second bill signed into law last month – Senate Bill 699 — specifically addressed out-of-state noncompete agreements by prohibiting employers from attempting to enforce them against California employees.

These two new laws will inevitably lead to litigation over their constitutionality, enforceability, and scope. In the meantime, employers with employees in California who signed contracts with noncompete provisions inclusive of non-solicitation provisions of both clients and employees should review with counsel their existing agreements applicable to California employees, to discuss their continued enforceability and ways to satisfy the notice requirement.