By: Emmanuel Perea Jimenez
On September 1, 2023, Governor Newsom signed Senate Bill 699 (SB 699), which further strengthens existing laws prohibiting noncompete agreements and other restrictive covenants, like employee non-solicitation clauses. Overall, SB 699 comes amid a nationwide trend against noncompete agreements, and greatly increases the risk associated with including them in contracts and enforcing them in court. Practitioners and employers should carefully review SB 699 to see how these changes may impact their existing employment contracts.
Historically, California law and public policy has frowned upon noncompete clauses and restrictive covenants. Business and Professions Code section 16600 codifies this policy: “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (There are narrow exceptions to this general rule that pertain to the sale of certain business entities, like LLCs.) California courts have largely followed this policy and rendered most noncompete agreements and restrictive covenants unenforceable. This trend has already made California’s legal regime regarding such agreements one of the strictest in the country.
Enter SB 699. This statute will be codified as section 16600.5 in the Business and Professions Code and will take effect on January 1, 2024—just a few short months away. Designed to bolster California’s existing law, SB 699 has several key provisions that practitioners and employers should review closely.
First, SB 699 voids noncompete agreements and restrictive covenants “regardless of where and when the contract was signed” and even if “the employment was maintained outside of California.” In other words, California is retroactively voiding all existing noncompete agreements and restrictive covenants. California also appears to be reaching for out-of-state contracts as well—which presents constitutional issues that are beyond the scope of this article. SB 699 also prohibits employers from (1) entering into new noncompete agreements with employees or job applicants and (2) from attempting to enforce those contracts.
But SB 699 does not stop there. The new law declares violations of SB 699 to be a “civil violation,” and creates a new private right of action to enforce the rights under this new law. So, starting in 2024, employees will be able to sue employers for using or attempting to enforce noncompete agreements. Employees will be allowed to obtain damages, injunctive relief, and, perhaps most notably, the provision also awards attorney’s fees—which will undoubtedly generate new litigation.
These tough new provisions are expressly aimed at employers. In enacting SB 699, the California Legislature expressly found that, despite the strong policy in favor of employee mobility and free competition: “California employers continue to have their employees sign noncompete clauses that are clearly void and unenforceable” and California employers still “pursue frivolous noncompete litigation [that] has a chilling effect on employee mobility.” By retroactively invalidating noncompete clauses and giving employees a right (and an incentive) to sue, the Legislature has raised the stakes for employers who include, and attempt to enforce, noncompete and other restrictive clauses in their contracts.
In closing, SB 699 creates a serious risk of liability for employers, while also giving employees increased protections and incentives to file suit. Employers would be well-advised to consult with their labor counsel to evaluate their existing agreements and before seeking to enforce (or oppose) a noncompete clause or restrictive covenant.