New California Law Expands Prohibitions on Enforcement of Noncompete Agreements
In California, Business and Professions Code Section 16600 prohibits noncompetition agreements except in limited circumstances, such as in the sale of a business. California employers generally understand that such agreements will not be enforced. But now, out-of-state employers may also be subject to California’s noncompete prohibition even when the agreement was lawfully entered into in their state of residence. Governor Gavin Newsom recently signed Senate Bill 699, amending Section 16600 and significantly broadening Section 16600’s noncompete prohibitions. This amendment bans employers from entering into or attempting to enforce noncompete agreements, even if the contract was executed in a state that allows noncompete agreements and the employee worked in that state. Additionally, this new law grants California employees remedies for violations of Section 16600. These remedies include injunctive relief, damages, and attorneys' fees and costs.
As an illustration, consider a scenario where an Arizona employee and employer establish a legally binding noncompete agreement. That former employee later relocated to California and started a competing business, and the employer, based in Arizona, initiated a lawsuit against the employee. Under this amended law, the former employee can file an action in California seeking an injunction, actual damages, and attorney's fees.
Recent U.S. Government Accountability Office data reveals that approximately 55% of employers report using noncompete agreements. However, recent trends do not favor these agreements. An increasing number of states are prohibiting their use in employment contracts, and in January 2023, the Federal Trade Commission (FTC) proposed a ban on most noncompete agreements. Furthermore, a memo from the National Labor Relations Board's (NLRB) General Counsel expressed the view that certain noncompete agreements may violate the National Labor Relations Act.
Even in jurisdictions like Wyoming, which permit noncompetition agreements, courts require these agreements to be reasonable in their scope. Agreements that excessively restrict an employee's ability to work in a large geographical area or for a lengthy period are likely unenforceable, even in jurisdictions where noncompete agreements are generally allowed.
In light of these developments, employers should thoroughly review their standard noncompete agreement to ensure it complies with local laws and is enforceable. Additionally, employers should be cautious and seek guidance before taking any action to enforce a noncompete against a current or former employee.