Legislative Update: Longstanding Prohibition of Contracts in Restraint of Trade Further Tightened by CA Legislature

Senate Bill 699 of 2023, signed earlier this month by California Governor Gavin Newsom, has placed an exclamation point at the end of California’s already time-honored tradition of laws and public policy against noncompete clauses in employment contracts.

Existing law under Business and Professions Code section 16600 provides:

• Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
  

The chapter excepts noncompetition agreements in the sale or dissolution of corporations (§16601), partnerships (§16602), and limited liability corporations (§16602.5).  Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule (§ 16600.)

Although California has had settled law in this area of promoting open competition, the Legislature felt the need to tighten this area even further this year by adding new section 16600.5 to the Business and Professions Code.  According to the author of the bill, Senator Anna Caballero:

• Noncompete clauses in employment contracts are extremely common in the United States.  Research shows that 1 in 5 workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide.  Despite California’s strong laws and public policy against noncompetition agreements, companies that do business in California continue to attempt to enforce noncompete agreements against California residents.  As the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.  Employers who pursue frivolous noncompete litigation can have a chilling effect on employee mobility. SB 699 seeks to strengthen penalties for employers who attempt to utilize non-competes[.]
  

The California Employment Lawyers Association, in support of SB 699, added that:

• … although noncompete clauses have been unlawful in California since 1872, our attorneys routinely see these clauses included in employment agreements with California employees.  These clauses restrict workers from freely switching jobs, which lowers overall wages, and undermines fair competition.  These clauses can have a significant chilling effect on workers who may not understand that such agreements are void under California law.
  

Thus, the goal of Senate Bill 699 is to deter employers from attempting to insert noncompete clauses into their contracts by tightening up the law in the following ways:

• This bill makes clear that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed.
• Also, the bill prohibits an employer or former employer from attempting to enforce a contract that is void under California’s restraint of trade law regardless of whether the contract was signed, and the employment was maintained outside of California.
• Further, the bill prohibits an employer from entering into a contract with an employee or prospective employee that includes a provision that is void under restraint of trade law.
• The bill also provides that an employer that enters into a contract that is void under California’s restraint of trade law or attempts to enforce a contract that is void under California’s restraint of trade law commits a civil violation.
• The bill provides that an employee, former employee, or prospective employee may bring an action to enforce these provisions for injunctive relief or the recovery of actual damages, or both.  A prevailing employee, former employee, or prospective employee is also entitled to recover reasonable attorney’s fees and costs.

Questions about noncompete clauses or any other parts of your employment contracts? Rosasco Law Group, APC can help ensure your contracts are up to date.