Typically, California leads the charge in the nation’s legislative landscape, particularly with regards to noncompete laws. Despite sizable challenges at the national scale, including New York’s governor vetoing a ban on noncompete agreements, and fierce opposition from industry groups towards a similar Federal Trade Commission rule, California has succeeded in passing two laws in 2023—Assembly Bill 1076 and Senate Bill 699. These laws fortify the state’s enduring rejection of noncompetes, which stymie employees from pursuing new employment opportunities in a similar field or establishing competing businesses post-employment.
Assembly Bill 1076 formally entrenched existing California case law, rendering noncompetes in the employment context unenforceable, with the narrow exception of business sales or dissolutions. This bill placed great emphasis on the prohibition of noncompetes, appealing directly to judicial precedence set by Edwards v. Arthur Andersen LLP. Unfortunately, the status of no-raiding clauses remains indistinct due to inconsistent historical rulings, as demonstrated by different outcomes in Loral Corp. v. Moyes and AMN Healthcare, Inc. v. Aya Healthcare Servs.
Consequently, these pieces of legislation have wide-ranging implications, influencing not only Californian businesses but any company with employees in California. On a practical level, with a looming deadline of February 14th, companies in breach of AB 1076 can expect penalties; a company’s violation is an act of unfair competition under the Unfair Competition Law, and they will face civil penalties for each individual infringement.
Applicable from January 2024, Senate Bill 699 adds a new facet to the California Business & Professions Code; any contract with a restraint on trade, irrespective of its original jurisdiction or timeline, becomes unenforceable in California. This law opens up companies to significantly increased risks, from potential lawsuits to substantial costs, even if they eventually win the legal dispute.
With the enactment of AB 1076 and SB 699, companies should urgently review their employment agreements to determine if they contain noncompete or customer nonsolicitation provisions and convey a written notice to the relevant employees by the February 14 deadline if necessary. These companies will also need to assess their offer letter or employee handbook terms to ensure that no restrictive covenants exist inadvertently.
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