California Expands Prohibition Against Non-Competition Agreements

On September 1, 2023, Governor Newson signed into law Senate Bill 699 (“SB 699”). SB 699 enacts Business and Professions Code (“B&P Code”) Section 16600.5 amending California law’s existing prohibition against non-competition agreements to include any such agreement regardless of where or when the agreement was signed.

B&P Code Sections 16600 et seq. currently prohibits every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind, except in the connection with certain sales of a business, the dissolution of a partnership or limited liability company, the disassociation of a partner from a partnership, or the termination of a member’s interest in a limited liability company. New Section 16600.5 expands that restriction to contracts entered into outside of California or sought to be enforced in California as follows:

• Any contract that is void under the B&P Code is unenforceable regardless of where and when the contract was signed.
• An employer or former employer is prohibited from enforcing a contract that is void under the B&P Code “regardless of whether the contract was signed and the employment was maintained outside of California.”
• An employer is prohibited from entering into a contract with an employee or prospective employee that includes a provision that is void under the B&P Code.
• An employee, former employee or prospective employee may bring a private action to enforce the law and seek injunctive relief, actual damages and attorney’s fees and costs incurred in such action.

Enforcement of the new law may face jurisdictional and constitutional challenges. For example, if a California business enters into an employment contract with an out-of-state individual residing in a state where employee non-competition agreements are permitted, a California court would deem the non-compete to be unenforceable; however, might the employer be able to obtain enforcement by seeking relief in the courts of the other state? If an employer and an employee enter into a non-competition agreement in a jurisdiction in which they are permitted and the employee quits and moves to California, the employer would apparently not be able to obtain judicial relief in California under B&P Section 16600.5, but could it obtain relief in its own state and seek to have the judgment enforced in California against the former employee?

California is not the only jurisdiction that opposes non-competition agreements. Several other states currently have or are considering such bans. Further, the Federal Trade Commission has proposed a new rule (see: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking) that would ban employers from imposing non-competes on their workers, noting that “the practice suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” California employers with out-of-state employees as well as out-of-state employers with employees (or former employees) now residing in California should review their employment agreements and seek legal counsel for guidance in this developing area.