CALIFORNIA PASSES TWO MORE LAWS TO PROVE HOW MUCH IT ABSOLUTELY DETESTS NON-COMPETE CLAUSES

Back in 1872, as a fractured and battle-weary nation tried to recover from the effects of the Civil War, dealing with racism and poverty, and  trying to reconcile incompatible personal values and business practices, people started moving west.   California was thriving, and it needed to throw down some laws to manage the economic growth.  One of the first things it did was to concentrate on making sure free enterprise was valued.   That included instilling a right that employees were free to move from business to business.  

Consequently, California’s ban on non-compete clauses dates back to 1872 – before their worker’s compensation laws in 1911 and their labor laws in 1937.  The non-discrimination laws followed in the late 1950s (by the way, all of these pre-dated the federal versions of these laws). 

Only four other states ban non-compete agreements, but this is becoming a trend.   Currently, Oklahoma, North Dakota, Minnesota, and New York have joined California, the last two only in the last year.  But others are poised to join these five – a practice California started 150 years ago.  And talk is that the Biden administration wants to take this show on the road and expand this law nationwide.  What I find interesting is that two of the states on this list, Oklahoma and North Dakota, are very red states.  This law does not necessarily travel along the usual “red/blue” lines.  Many business owners in California know they got their start by breaking off from and competing against their former employer.  They all know how the game is played in this state.   For those of us who have always done business in this state, we just know, this is how it is.  You want your valuable employees to stay, you need to find another way to keep them other than paper handcuffs.

So let’s take a look at California law, both the pre-existing prohibition and the new enhancements.   Business & Professions Code Section 16600 is the law that has been in place for a while. That is the law that prohibits non-compete agreements or clauses with any rank and file employee, that is, in any agreement where someone does not have an ownership share of the business and is selling back that piece.  But it is more than someone having an ownership share.  That piece of the business needs to be meaningful.  I can’t be selling back my one share of Packer’s stock (although it did go up this year, thank you Jordan Love and Matt LaFleur).   I would have to truly have meaningful control of the Packers, and while I would like to think that the hat I wear on certain gamedays does that have effect, I think that is more superstition, not true control of the team.  In essence, I need to be selling back “goodwill” in the business. 

Over time, California has strengthened this law.  It does not just apply to agreements made and performed in California.  An out of state agreement signed elsewhere but performed by an employee working in California will not be enforced by the California courts, even if the agreement calls for out of state law to govern, for example. 

For many years, however, California employers drafting agreements knew that these clauses were unenforceable, but some employers, being bad employers, would still put these clauses in agreements, thinking it would deter their employees from competing.  In response, California, called employers on this conduct.  They said, if employers put these VOID, unlawful clauses in these employment agreements, it would actually make the entire agreement UNENFORCEABLE.  So much for your lovely little employment contract, Employer.  You can’t have any of it!   The non-compete will blow up everything you wanted.  The confidentiality provision.  The arbitration.  The work for hire.  All gone. 

For this reason, I would be surprised if any of you have any “invalid non-compete agreements” in place with any of your employees.  That is why I didn’t really pay much attention to these two new laws that were passed at the end of 2023.  But because I have gotten a few questions about them, I am writing about them here.  And there are a few interesting things to note about them.

First, SB 699 authorized civil lawsuits, including injunctive relief and damages, against employers in California, “regardless of when or where the contract was signed and whether employment was maintained outside of California.” 

So, now that California employers know they cannot have non-competes with their out of state employees, down drops AB 1076.  This law requires employers to notify their current OR FORMER employees who were employed after January 1, 2022, whose contracts include a non-compete clause or agreement that their agreement is VOID.  Each notice must be a written communication individualized to the employee or former employee and delivered to the person’s last known address and email address. A violation of these new provisions constitutes unfair competition under California’s Unfair Competition Law, which provides that a court must impose a civil penalty of up to $2,500 for each violation.  The Notice must go out by February 14, 2024. Happy Valentine’s Day, all. 

Once again, these laws impact NON-COMPETE agreements.  These are not NDAs, confidentiality agreements, etc.  However, some of you have in place no-hire provisions.  Depending on how these are worded, for example, you may have a no-hire agreement with a competitor and restrict that competitor from hiring your employees, but you’re in a small town where only you and this competitor are effectively the two biggest employers in the area.  That may in effect become a non-compete agreement. 

If you have non-compete agreements with out of state employees which were made invalid by virtue of SB 699, yes, we do need to notify those employees.  Do not be ashamed that the new law now made these agreements invalid.  The law CHANGED.  It’s okay.  We just have to tell them their contracts are no longer valid.   But that is why were given six weeks to notify them after the law changed.  We can dress it up with little candy hearts (seriously, WHY Valentine’s Day??)

If you are in doubt about your agreements, reach out.  Better to be safe.