On September 1, 2023, Governor Newsom signed SB 699 into law that adds additional prohibitions on employer’s use of non-competition agreements and another restrictive covenants. This legislation has several key components that employers both within and outside California should be keenly aware of:
1. Implementation Date: The law will take effect from January 1, 2024.
2. Restrictions on Non-Compete Agreements: AB 699 introduces additional prohibitions on the use of non-compete agreements by employers. This is codified under section 16600.5 of the Business and Professions Code. Significantly, this section renders any such agreement unenforceable by an employer or former employer, irrespective of the location and time of signing or even if the employee’s role was maintained outside California. The new provision empowers employees, ex-employees, or potential hires to seek a private action for injunctive relief, damages, or both. Moreover, a prevailing employee or potential employee is also entitled to attorney’s fees and costs.
3. Implication for Current Agreements: Employers in California who currently employ non-competition agreements should assess and possibly modify or annul these agreements before January 1, 2024. Historically, there were no monetary repercussions for California employers maintaining unenforceable non-compete agreements. If contested, courts would simply deem such agreements void. The landscape has now changed. Employees, including prospective ones, have a monetary incentive (in addition to the plaintiff’s attorneys who are now entitle to fees if they prevail) to contest any contract that infringes on section 16600. Successful litigants can now claim damages, injunctive relief, attorney’s fees, and costs. Employers found in breach of section 16600 might also face a PAGA representative action, potentially incurring penalties across their entire workforce.
4. Scope Beyond California: Interestingly, AB 699 isn’t confined to only California employers. The law’s intent is to deter employers, even those never based in California or those without California employees, from enforcing a non-competition agreement against someone hired by a Californian employer. The rationale is that California aims to protect its employers’ freedom to employ anyone, regardless of their state of residence, to foster a competitive business environment. Nonetheless, non-Californian employers are expected to challenge this scope of the new law, especially if they’ve entered valid non-competition agreements with residents from other states and those agreements are legally binding under the other states’ laws. Legal challenges based on constitutional grounds are anticipated.
5. Potential Liability for Non-Solicitation Agreements: Employee non-solicitation clauses may be at risk as well if they are overly restrictive, thereby impinging on the employee’s freedom to work. In Loral Corp. v. Moyes (1985), the Sixth District Court of Appeal ruled that the agreement at issue was more of a “noninterference agreement” between the employer and former employee and upheld the employer’s non-solicitation provision. The ruling upheld an agreement that prevented the former employee from soliciting employees from the employer, and even though the agreement did not have a time limitation, the court interpreted the agreement to apply a one-year limit. However, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) a different court of appeal held that an employee non-solicitation provision could be deemed an illegal restraint on trade. Consequently, employers employing such non-solicitation provisions could face increased liability under AB 699 if these clauses violate the Business and Professions Code.
To sum up, SB 699 heralds a new chapter in the landscape of employment agreements, and employers should be proactive in understanding and adapting to these changes.