In 1872, California bucked the common law and the views of many other states by declaring noncompete agreements unenforceable except in narrow and limited circumstances. The crackdown has continued ever since, including two bills enacted in recent months. One of these bills, SB 699, is covered in a September 2023 GT Alert. On Oct. 13, 2023, California Governor Gavin Newsom signed into law additional legislation that continues the state’s restrictions on noncompete agreements. Assembly Bill (AB) 1076 bill codifies existing caselaw, extends the state’s noncompete prohibitions to non-parties to a contract, declares noncompete agreements “unlawful,” and adds a new notice requirement. AB 1076 takes effect Jan. 1, 2024, and employers must satisfy the law’s notice requirement by Feb. 14, 2024.
Summary of AB 1076
First, AB 1076 codifies existing caselaw, Edwards v. Arthur Andersen, LLP 44 Cal. 4th 937 (2008), which held that California’s existing noncompete statute, Section 16600 of the Business Professions Code, prohibits even narrowly drawn noncompetition agreements unless the agreement falls within a statutory exception. Consistent with Edwards, AB 1076 specifies that Section 16600 should be “read broadly . . . 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.” By codifying the caselaw, California has made it clear that all noncompetition agreements, no matter how narrowly drawn, are unenforceable unless a statutory exception applies – and made it more difficult for the courts to depart from Edwards.
Second, and taking it a step further, AB 1076 makes it “unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement,” unless an existing (narrow) exception applies. Previously, such agreements were void, meaning they were unenforceable in California. AB 1076 makes the inclusion of a noncompete clause or requiring an employee to enter a noncompete agreement an act of unfair competition under California Business and Professions Code Sections 17200 et seq. Employers may face a civil penalty of up to $2,500 per violation.
Third, AB 1076 extends California’s noncompete restrictions to “contracts where the person being restrained is not a party to the contract.” The reach of this provision is not entirely clear. Read in context with Edwards’s expansive interpretation of California’s noncompete prohibitions, AB 1076’s non-party provision could be read broadly to ban agreements between contracting parties that have the impact – whether intended or not – of restraining a third party from engaging in their chosen profession, trade, or business. As just one example, this would include business-to-business contracts prohibiting the hiring of each other’s employees, among potentially other types of agreements.
Fourth, AB 1076 adds a notice requirement. Employers have until Feb. 14, 2024, to notify current and former California employees who were employed after Jan. 1, 2022, and subject to a noncompliant noncompete clause, that their noncompete is void. Notice is required to the employee’s last known mailing and email addresses. Failure to provide notice is an act of unfair competition, which may subject the employer to civil penalties up to $2,500 per violation. Notice is not required for lawful noncompete agreements that satisfy one of California’s narrow exceptions. The notice requirement appears limited to “noncompete agreements,” including agreements with a “noncompete clause.” The bill’s plain language does not appear to require notice of other agreements or clauses that some courts have analyzed under Section 16600, such as non-solicitation and overbroad confidentiality provisions. It remains to be seen whether courts will interpret the bill to require notice of these types of agreements and clauses.
California’s Crackdown on Noncompetes
The passage of AB 1076 comes just over a month after the passage of SB 699. It also follows other states, the Federal Trade Commission, and the National Labor Relations Board’s efforts to limit or prohibit noncompete agreements. SB 699 voids unlawful noncompete agreements in California, regardless of where and when the contract was signed and whether employment was maintained outside of California. It also creates a private right of action to enforce the prohibition on noncompetes.
Even though most types of noncompete agreements have long been void in California, SB 699 and AB 1076 represent California’s goal to strengthen public policy against such agreements. By voiding noncompete agreements regardless of where and when the contract was signed, creating a private right of action for employees to enforce the ban, extending the ban to cover more agreements, and requiring employers to notify employees that such agreements are void, the California legislature has made it clear that noncompliant noncompete agreements will not be tolerated in the state.
What This Means for Employers
AB 1076 adds a burden and potential liability for employers both in and outside of California who have employees that may avail themselves of this California law. Employers may consider the following to reduce the risk of noncompliance:
- Auditing employment agreements signed by current and former California employees (employed after Jan. 1, 2022) – including, in light of SB 699, California employees who signed noncompete agreements in other states – for noncompete provisions that violate California law.
- Notifying current/former employees that noncompliant noncompete clauses are void by the Feb. 14, 2024, deadline.
- Reviewing template employment agreements, template offer letters, and existing employment agreements that risk restraining trade in violation of Section 16600.
- Reviewing other agreements that may have the effect of restraining a non-party from engaging in their chosen profession, trade, or business.