Written By: Francine Alfandary and Austin Ochoa
California has long prohibited non-competition covenants, and to a certain extent non-solicitation covenants, which apply after termination of employment. California has now added teeth to the prohibition with the enactment of two new laws.
The new laws amend Section 16600 and introduced Sections 16600.1 and 16600.5 to the California Business and Professions Code, render post-employment non-competition agreements void and unenforceable. This alert aims to dissect the intricate details of the amendments, shedding light on the rights and obligations they confer upon employers and employees alike.
The new laws:
- Establish that any contract that is void under Section 16600 of the California Business and Professions Code is unenforceable regardless of where or when it was signed, prohibits employers from enforcing such contracts, and allows affected individuals to take legal action for damages and attorney fees.
- Require any employer who entered into a non-compete agreement with a current employee or former employee hired after January 1, 2022, which agreement violates the California prohibition on post-employment restrictive covenants, to notify such employee that the agreement is void by February 14, 2024.
The following provisions were added to Section 16600.5 of the California Business and Professions Code:
- Non-compete agreements considered invalid under Section 16600 of the California Business and Professions Code are unenforceable, regardless of where or when they were signed.
- Employers are not allowed to enforce invalid non-compete agreements, even if the agreement was signed and the employment was maintained outside of California.
- Employers cannot include invalid non-compete provisions in contracts with employees or prospective employees.
- Any employer who tries to enforce an invalid non-compete agreement faces civil penalties.
- Current, former, or prospective employees have the right to take private legal action to enforce this law, seeking injunctive relief and/or recovering actual damages. If successful, they can also receive reasonable attorney’s fees and costs.
The following provisions were added to Section 16600.1 of the California Business and Professions Code:
- If an employer entered into a non-compete agreement with a current employee or former employee hired after January 1, 2022, and the agreement does not meet statutory exceptions, the employer must notify the employee that the non-compete provision is void by February 14, 2024.
- Such notice must be in the form of a written individualized communication to the employee or former employee, and sent to their last known physical and email addresses.
- Failing to provide this notification is considered unfair competition within the meaning of Chapter 5 (Section 17200 of the California Business and Professions Code).
Exceptions
California allows non-compete agreements if all the following apply:
- A person sells the goodwill of a business, or an owner of a business entity sells or otherwise disposes of all of their ownership interest in a business entity, or an owner of a business entity sells:
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- all or substantially all of the operating assets together with the goodwill of the business entity;
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- all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary; or
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- all of the ownership interest of any subsidiary.
- The seller agrees with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on.
- The buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein. See California Business & Professions Code Section 16601.
Furthermore, non-compete agreements are permitted by statute in the following circumstances:
- Any partner may, upon or in anticipation of the dissolution of a partnership or from a partnership, agree that he or she will not carry on a similar business within a specified geographic area where the partnership business has been transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from any such other member of the partnership, carries on a like business therein. See California Business & Professions Code Section 16602.
- A member may, upon or in anticipation of a dissolution of, or the termination of his or her interest in, a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction recognizing such a series), agree that he or she or it will not carry on a similar business within a specified geographic area where the limited liability company business has been transacted, so long as any other member of the limited liability company, or any person deriving title to the business or its goodwill from any such other member of the limited liability company, carries on a like business therein. See California Business & Professions Code Section 16602.5.
Next steps
California employers should promptly review their existing employment agreements to ensure compliance with the recent legislative changes, and take steps to notify employees as required if necessary.
If you have any questions about how these changes may impact you or your business, or if you require assistance with the employee notices, please don’t hesitate to contact us:
Francine Alfandary, Partner at falfandary@pearlcohen.com
Austin Ochoa, Associate at aochoa@pearlcohen.com
