Governor Newsom Signs Bill Reinforcing California’s Ban on Noncompete Agreements

On October 13, 2023, California Governor Gavin Newsom signed a bill into law that will reinforce the state’s ban on noncompete agreements in employment by making it unlawful for employers to mandate that employees sign post-employment noncompete agreements and requiring employers to notify current and former employees that any post-employment noncompete agreements previously entered are void.

Quick Hits

• California governor signs a bill into law that will make it expressly unlawful for employers to include post-employment noncompete clauses in employment contracts or require employees to enter post-employment noncompete agreements.
• By February 14, 2024, employers must provide all current and certain former employees with individualized written notices that any post-employment noncompete clause in an employment agreement and/or post-employment noncompete agreement with the employer is void.
• The law takes effect on January 1, 2024.

The signing of Assembly Bill (AB) 1076 (codified as California Business and Professions Code Section 16600.1) comes on the heels of the state’s adoption in September 2023 of Senate Bill (SB) 699 (Section 16600.5), which will prohibit employers from entering into or attempting to enforce post-employment noncompete agreements.

AB 1076 similarly will make it 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 under Section 16600. AB 1076 and SB 699 both take effect on January 1, 2024.

AB 1076 takes a step further by imposing a potentially burdensome notification requirement on employers. AB 1076 will require employers, by February 14, 2024, to provide individualized written notices to all current employees and all former employees (employed after January 2022) stating that any post-employment noncompete clauses contained in employment agreements or any other post-employment noncompete agreements with the employer are void.

AB 1076 further provides that a violation of Section 16600.1 will constitute an act of unfair competition within the meaning of Business and Professions Code Section 17200. Notably, SB 699 separately will create a private right of action for violations of the chapter.

Unanswered Questions

Not only could employers face challenges complying with AB 1076’s broad notice requirements, but the bill also leaves unanswered key questions about how it interfaces with related provisions of the law. For example, California Labor Code Section 925, which generally prohibits out-of-state choice of law and venue provisions, allows employees to negotiate such clauses when represented by counsel. Potentially relying on this exception, some parties may have negotiated post-employment noncompetes that would otherwise be void under California law. AB 1076 calls into question whether those agreements would be subject to the AB 1076 notice requirement.

Additionally, AB 1076 does not define what constitutes an unlawful “noncompete agreement,” leaving open the question of whether employee nonsolicitation agreements will be barred by Section 16600 and thus subject to the AB 1076 notice requirement. While traditional post-employment noncompete agreements and customer nonsolicitation agreements have long been void under Section 16600, in 2008 in Edwards v. Arthur Anderson LLP, the Supreme Court of California left open the question of whether employee nonsolicitation agreements are void under Section 16600.

For years employee nonsolicitation agreements have been treated as permissible under California’s 1985 Sixth District Court of Appeal’s decision in Loral Corp. v. Moyes. In 2019, however, California’s Fourth Appellate District issued a decision that (along with subsequent federal court decisions) called into question the continued viability of employee nonsolicitation agreements in California. This uncertainty in the law could leave employers unclear about whether they are required to issue an AB 1076 notice for employee nonsolicitation agreements.

Next Steps

Together, AB 1076 and SB 699 underscore distrust of noncompete agreements in California. The new laws also come in the context of a broader push to ban noncompete agreements in employment, including similar restrictions on employers’ use of noncompete agreements by other states, including Minnesota and New York, and potential action by the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB).

Despite uncertainty in the scope and application of AB 1076, there are steps an employer may want to consider in order to prepare for the law’s enactment.

• Employers may want to consider conducting a privileged audit of employment agreements with existing employees and former employees hired after January 2022 to determine whether they include restrictive covenants of any kind.
• Employers may want to consider modifying agreements with current employees that contain potentially void noncompetition provisions.
• If an AB 1076 notice is required, employers may need to be prepared to ensure that it is (1) individualized, (2) in writing, and (3) sent to the last known address and email address of each covered employee by February 14, 2024.

For more information on the impact of AB 1076, please join us for our upcoming webinar, “California’s New Noncompete Notice Requirements: What You Need to Know,” on Wednesday, November 1, 2023, from 9:00 a.m. to 10:00 a.m. (PDT) / noon to 1:00 p.m. (EDT). The speakers, Danielle Ochs, Charles L. Thompson, IV, Christopher W. Olmsted, and Thomas M. McInerney, will discuss best practices for complying with the new post-employment noncompete notice requirements and explore some of the questions left unanswered by this new law. Register here.

Ogletree Deakins will continue to monitor developments and will provide updates on the California and Unfair Competition and Trade Secrets blogs.

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Editor’s Note: This article was updated after publication with the details for Ogletree Deakins’ upcoming webinar to discuss the impact of AB 1076.