Tag Archives: Noncompete Reform

Russell Beck‘s article about California’s new, expanded, anti-restrictive covenant laws was published by Law360 under the title, “Get Ready for Calif.’s Expanded Restrictive Covenant Ban.”

The article, reprinted in full below, analyzes California’s new law expanding the scope of their restrictive covenant ban.

n October 13, California Gov. Gavin Newsom signed the second of two bills that, together, expand California’s restrictive covenant law and prioritize it over the laws of every other state.

The two new laws go into effect on Jan. 1, 2024, and will operate retroactively.

What do you need to know?

First, the background.

While most states permit reasonable employee noncompete agreements,[1] California has banned employee noncompetes since 1872.[2]

Some courts, however, had interpreted Californina Business and Professions Code Section 16600 — California’s noncompete statute — as making illegal only “those restraints which preclude one from engaging in a lawful profession, trade, or business,” but permitting restrictive covenants “where one is barred from pursuing only a small or limited part of the business, trade or profession.”[3] This interpretation was generally referred to as the narrow restraint doctrine.

In 2009, in Edwards v. Arthur Andersen LLP, the California Supreme Court rejected the narrow restraint doctrine and made it clear that the ban applied not only to noncompetes, but to nonsolicitation of clients as well.[4]

Following that decision, other courts in California have found no-recruit agreements[5] and broad confidentiality agreements to be banned by the statute as well.[6]

hat brings us to this year.

During September and October, the California Legislature extended the ban even further through two new laws.

The first law — S.B. 699 — adds Section 16600.5 to the California Business and Professions Code. With that new law, which will become effective on Jan. 1, California essentially thumbed its nose at all other state laws, virtually saying, “California’s public policy against restraint of trade law trumps other state laws.”

The impact of the law is extreme. By way of example, an employee living in Massachusetts with a noncompete executed in Massachusetts, valid in Massachusetts, enforceable in Massachusetts, and for which the employee received substantial consideration, can — according to California’s soon-to-be-effective law — flee to California, void the contract and ignore those otherwise-lawful obligations with impunity.[7]

Whether this law is constitutional or will be enforced by non-California courts remains to be seen.

However, apparently unsatisfied with merely imposing its existing state policy on the rest of the country, California has doubled down on its policy, both expanding the scope of its restrictive covenant ban and imposing additional obligations on companies using restrictive covenants.

Specifically, the law signed by Newsom on Oct. 13 — A.B. 1076 — changes California’s noncompete statute in several ways.

First, it mandates that Section 16600 “shall be read broadly, in accordance with Edwards v. Arthur Andersen … to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored.”[8]

Second, it prohibits companies from including “a noncompete clause in an employment contract, or … requir[ing] an employee to enter a noncompete agreement, that does not satisfy an exception in this chapter.”[9] To be clear: This does not just void an agreement or render it unenforceable — it prohibits its use.

Third, it requires companies — by Feb. 14, 2024 — to notify employees subject to a covenant that violates Section 16600 that their restrictions are void.[10] This notice requirement applies to current employees, as well as to former employees who were employed after Jan. 1, 2022.[11] The notice must be “in the form of a written individualized communication to the employee or former employee, and shall be delivered to the last known address and the email address of the employee or former employee.”[12]

Fourth, not surprisingly, the new law also adds penalties for failing to comply by making it “an act of unfair competition” to violate the statute.[13]

ow will this affect you?

First, the new law immediately presents a threshold question: What agreements, in addition to noncompetes and nonsolicitation covenants, are covered?

Although purporting not to constitute a change, but rather to be “declaratory [of] existing law,”[14] the law does in fact expand on existing case law.

For example, it seems to change the law on no-recruit agreements. Currently, the law is unsettled. But the following language suggests that no-recruit agreements will likely be prohibited going forward: “This section shall not be limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract.”[15]

This language presumably covers many other agreements as well. For example, it seems to prohibit joint venture agreements and confidentiality agreements in connection with a possible merger or acquisition, where the company parties agree not to hire the other party’s employees during the joint venture or exploratory period — putting aside for some time after.[16]

Similarly, broad confidentiality agreements are likely also covered, at least to the extent that the confidentiality obligations could be interpreted to be so broad as to effectively prevent someone from working in their field, i.e., effectively constituting a noncompete agreement.[17]

Second, the new law will affect different companies and employees differently.

From the perspective of a company that is incorporated or headquartered in California, there is an argument that the company simply cannot use noncompetes, nonsolicits, no-recruits, broad nondisclosure agreements or other agreements that might violate the new law with anyone. Full stop. No employees. Nowhere.

To the extent that the company is using any of these restrictive covenants, it will need to take steps to promptly undo those agreements and notify affected employees — and others with whom they may have such agreements.

From the perspective of a company outside of California with employees in California, the new law can still be an issue. Companies with California employees who have noncompetes or nonsolicits — and likely no-recruits and broad nondisclosure agreements — will need to promptly come up with a plan for complying with the new law.

For example, such companies will need to consider whether to send notices at all and, if so, which employees they will send notices to. And they will need to consider whether and how to address no-recruit agreements and confidentiality agreements. They will also need to make sure that they are taking reasonable measures to protect their trade secrets, other confidential information, customer and employee goodwill, and any other legitimate business interests.

From the perspective of an employee, this is obviously a boon. I expect we will see an increased number of employees fleeing — at least temporarily — to California to void their restrictive covenants. California will become even more of a clearing house for employees who live, work and enjoy benefits received in other states, in exchange for agreeing to a restrictive covenant. Specifically, many of those employees are likely to relocate to California to relieve themselves of their otherwise-enforceable contractual obligations.

We will have to see how this all plays out, but I fully expect that there will be plenty of legal challenges to the law. And I expect they will come soon, given the Jan. 1, 2024, effective date, the laws’ retroactive operation and the Valentine’s Day deadline to send notice to affected employees.

hat steps should you take now?

As noted above, the time to come up with a plan for compliance with the new California laws is short. Planning should start now.

Separately, now is also the time to revisit how your company — or your clients’ companies — protects confidential information, including trade secrets, and other legitimate business interests. While there are many contractual options,[18] including for example, deferred compensation plans governed by the Employee Retirement Income Security Act that have forfeiture-for-competition provisions,[19] their effectiveness may be questionable in light of California’s new laws.[20]

For that reason, it is all the more important to have a comprehensive trade secret — and other legitimate business interest — protection plan in place now.

A good starting point is to review all documents related to protecting the company’s legitimate business interests. Those documents include any restrictive covenant agreements, whether contained in employment agreements, restricted stock unit agreements, stock option agreements, long-term incentive agreements or other agreements, and policies and codes of conduct. All such documents should be brought into compliance and strengthened as much as permissible and appropriate.

From an operational standpoint, make sure that there is a culture of confidentiality. That is not to say that all information needs to be locked down; there is always a balance. If information is locked down too tightly, work becomes less efficient and people will find workarounds, likely resulting in even less security for the information.

Training is critical.[21] And it should be provided at all stages of the employment life cycle where there is a risk of infiltration of — and contamination by — someone else’s information, or a risk of exfiltration and loss of trade secrets. Training of some sort should be conducted during the recruiting and onboarding process, through and during the employment relationship, and at off-boarding.

Given that the goal is to protect trade secrets, as well as customer relationships and other legitimate business interests — as opposed to being able to win a costly, time-consuming lawsuit after the fact — preemptive measures are critical. Take them now before there is a problem. It truly is the case that an ounce of prevention is worth a pound of cure.

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For up-to-the-minute analysis of legal issues concerning trade secrets and noncompete agreements in Massachusetts and across the United States, read Russell Beck’s blog, Fair Competition Law.

eck Reed Riden LLP is among the leading authorities in trade secret, noncompete, and unfair competition law, and our experience handling these matters is backed by our extensive employment law and business litigation experience. Our hand-picked team combines attorneys with complementary expertise and practical experience.

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[1] See Beck, Employee Noncompetes, A State-by-State Survey (“50 State Noncompete Survey”), available at https://www.beckreedriden.com/50-state-noncompete-chart-2/.

[2] See Cal. Bus. & Prof. Code § 16600.

[3] See Campbell v. Trustees of Leland Stanford Jr. Univ ., 817 F.2d 499, 502-03 (9th Cir. 1987) (citations omitted).

[4] Edwards v. Arthur Andersen , 44 Cal.4th 937, 81 Cal. Rptr. 3d 282, 189 P.3d 285 (Cal. 2008). The “narrow restraint” exception was, as its name implies, an interpretation of Cal. Bus. & Prof. Code § 16600 that permitted certainly narrowly tailored restrictive covenants.

[5] No-recruit agreements are often called “employee nonsolicitation clauses” (or simply “nonsolicitation agreements”) or “no-raid” agreements.

[6] See, e.g., AMN Healthcare, Inc. v. AYA Healthcare Servs., Inc ., 28 Cal.App.5th 923, 936-939, 239 Cal. Rptr. 3d 577 (Cal. Ct. App. 2018) (no-recruit agreements); Parsable, Inc. v. Landreth , 2022 WL 19692034, at *3-4 (N.D. Cal. Aug. 5, 2022) (no-recruit agreements); Brown v. TGS Mgmt ., 57 Cal.App.5th 303, 271 Cal. Rptr. 3d 303 (Cal. Ct. App. 2020) (broad confidentiality agreement). Instructively, none of these cases was decided by the California Supreme Court, and therefore they do not overrule preexisting case law, including case law suggesting that no-recruit agreements are permissible under Cal. Bus. & Prof. Code § 16600, such as Loral v. Moyes , 174 Cal. App. 3d 268, 278-280 (1985).

[7] This new law is discussed in some detail in Russell Beck, California is set to (officially) tortiously interfere with noncompetes from other states (Sept. 6, 2023), available at https://faircompetitionlaw.com/2023/09/06/california-is-set-to-officially-tortiously-interfere-with-noncompetes-from-other-states/; and Sarah Tishler, Calif. Law Tests Noncompete Prohibitions’ Potential Reach (Oct. 3, 2023), available at https://www.law360.com/articles/1726065/calif-law-tests-noncompete-prohibitions-potential-reach.

[8] New Cal. Bus. & Prof. Code § 16600(b)(1).

[9] New Cal. Bus. & Prof. Code § 16600.1(a).

[10] New Cal. Bus. & Prof. Code § 16600.1(b)(1).

[11] Id.

[12] New Cal. Bus. & Prof. Code § 16600.1(b)(2).

[13] New Cal. Bus. & Prof. Code § 16600.1(c).

[14] New Cal. Bus. & Prof. Code § 16600.1(b)(2).

[15] New Cal. Bus. & Prof. Code § 16600(c).

[16] Though perhaps offering little solace, while these types of B2B agreements might be void under section 16600, they likely do not constitute an act of unfair competition under 16600.1(c) insofar as they neither are in an employment contract nor “require an employee to enter a noncompete agreement . . . .”

[17] See Brown v. TGS Mgmt. , 57 Cal.App.5th 303, 271 Cal. Rptr. 3d 303 (Cal. Ct. App. 2020); FTC proposed “Non-Compete Clause Rule,” available at https://www.federalregister.gov/documents/2023/01/19/2023-00414/non-compete-clause-rule.

[18] For some suggestions, see Russell Beck and Erika Hahn, 3 Ways To Plan For A Possible Federal Ban On Noncompetes (March 17, 2021), available at https://www.law360.com/articles/1363450/3-ways-to-plan-for-a-possible-federal-ban-on-noncompetes; Russell Beck, Change of Course on Noncompetes: President Biden to Issue Executive Order (July 8, 2021), available at https://faircompetitionlaw.com/2021/07/08/change-of-course-on-noncompetes-president-biden-to-issue-executive-order/.

[19] See Gretchen Harders and Cassandra Labbees, ERISA Nonqualified Deferred Compensation Plans, Restrictive Covenants, and ERISA Preemption (June 27, 2019), available at https://www.natlawreview.com/article/erisa-nonqualified-deferred-compensation-plans-restrictive-covenants-and-erisa#:~:text=A%20restrictive%20covenant%20in%20a,a%20result%20of%20the%20behavior.

[20] Some of these agreements may also be of questionable utility if the Federal Trade Commission moves forward with a rule that would ban noncompete agreements as well as any other agreements that the FTC interprets to be “de facto” noncompetes, such as broad confidentiality agreements. See Russell Beck, FTC Should Take Nuanced Approach On Noncompete Regs (July 19, 2021), available at https://www.law360.com/articles/1403765/ftc-should-take-nuanced-approach-on-noncompete-regs.

[21] Even short video trainings can be helpful. See Beck Reed Riden, LLP’s Ten Minute Trade Secret TrainingTM videos, available at https://beckreedriden.com/50-state-noncompete-chart-2/.