Under a new law passed last year in California, employers in the state are not only barred from including noncompete provisions in their employment agreements, but were also required to give written notice to certain employees by February 14, 2024 that any noncompete provisions in their existing employment agreements are void.
Assembly Bill 1076
On October 13, 2023, California’s Governor signed Assembly Bill 1076 (“AB 1076”), legislation further restricting the use of noncompete provisions in California employment agreements. While California law already prohibited many forms of noncompete agreements, AB 1076 formally codifies the California Supreme Court’s determination in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008) that even “narrowly tailored” noncompete agreements are void and unenforceable.
AB 1076, however, did not stop at merely codifying existing California caselaw. The new law also adds a new Section 16600.1 to California’s Business & Professions Code. This new statute has a few noteworthy components.
First, Section 16600.1 states that it shall be unlawful for an employer to include a noncompete clause in an employment contract, or to require an employee to enter into a noncompete agreement.[1]
Second, Section 16600.1 requires employers to provide written notice to any current or former employers who were employed after January 1, 2022, and whose contracts included a noncompete clause, that the noncompete provisions of their employment agreement are void. The law required employers to provide this written notice to employees by February 14, 2024.
Third, the new law adds a degree of enforcement teeth to these anti-noncompete measures by making a violation of Section 16600.1 constitute “an act of unfair competition” under California’s Business & Professions Code §§ 17200, et seq.
Too Late to Comply?
For employers in California who did not provide the written notice required under Section 16600.1 before February 14, 2024, the question becomes whether to do so now. There are a few reasons to believe that the answer is probably “better late than never.”
The direct consequences for violating Section 16600.1 are already somewhat limited, but may be limited even further by attempting compliance, even if belatedly. Individual persons harmed by an “act of unfair competition,” such as a violation of Section 16600.1, can seek an injunction to prevent the conduct from continuing or seek restitution for losses attributable to the act of unfair competition.[2] However, providing notice, even after the February 14 deadline, would likely moot any such claim. And while state and local governments are authorized to seek civil penalties for acts of “unfair competition”—up to $2,500 for each violation—it is reasonable to suspect that government authorities are more likely to expend limited prosecutorial resources targeting employers that are willfully disregarding Section 16600.1, rather than those who are attempting to comply with it. Indeed, among the factors considered in determining the size of a civil penalty for acts of unfair competition are “the persistence of the misconduct,” “the length of time over which the misconduct occurred,” and “the willfulness of the defendant’s misconduct.”[3]
Providing late notice, rather than none at all, may also the preferable option from the perspective of maintaining good employer-employee relationships. Moreover, noncompliance could reflect negatively on the employer in the event of a dispute with an employee who was entitled to notice, including a dispute involving enforcement of other provisions in the employee’s employment agreement. In a lawsuit to enforce the employment agreement, the employee could attempt to assert counterclaims or affirmative defenses (such as unclean hands) based on the employer’s failure to comply with the provisions of Section 16600.1.
Given these considerations, it may be prudent for employers who missed the February 14, 2024 notice deadline to correct the issue now, rather than later, when the consequences for noncompliance could potentially be more significant.
Employers Need to Stay up to Date on Changes to the Law Governing Noncompete Agreements
AB 1076 is part of a continuing trend, in California and beyond, of tightening restrictions on the use of employee noncompete agreements. Shortly before signing AB 1076, Governor Newsom signed another bill, Senate Bill 699, which broadened California’s prohibition on noncompete agreements to all contracts between California employers and employees, regardless of where the contract was signed or where the employment was maintained. Senate Bill 699 also establishes a private right of actions for employees to seek injunctive relief, damages, and attorneys’ fees based on an employer’s attempt to enforce a noncompete agreement.[4]
This trend is not limited to California. For instance, Colorado recently passed a law that tightened already strict restrictions on the types of employee noncompete agreements that are enforceable in the state.[5] The law also voids otherwise enforceable noncompete provisions unless the employer satisfies extensive notice requirements to the employee.[6]
There is even the potential to see new restrictions on noncompete agreements at the national level. The United States Federal Trade Commission has proposed a new rule banning employers from imposing noncompete agreements on workers and is expected to announce a decision on the proposed rule in April 2024.[7]
Given this rapidly changing landscape, employers in California and elsewhere should stay attuned to changes in the law wherever they operate to ensure that agreements with their employees are lawful and enforceable.
For further information, please contact:
Christopher J. Banks, Partner, Crowell
cbanks@crowell.com
[1] The statute does not clearly define the term “employment agreement” or what it means to “require an employee to enter a noncompete agreement.” “Employment agreement,” as used here, could potentially extend quite broadly into agreements more ancillary to the employment relationship, such as equity awards or severance agreements.
[2] Under Cal. Bus. & Prof. Code § 17203, a person may ask a court to enter an order or judgment “as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition … or as may be necessary to restore any person in interest any money or property, real or personal, which may have been required by means of such unfair competition.”
[3] Cal. Bus. & Prof. Code § 17206(b).
[4] Cal. Bus. & Prof. Code § 16600.5.
[5] Colo. Rev. Stat. § 8-2-113(2).
[6] Colo. Rev. Stat. § 8-2-113(4).
[7] See https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.
