California Requires Notifying Employees of Void Noncompete Agreements by February 14, 2024

With new laws that became effective on January 1, 2024, California continues to lead the charge on state regulation of post-employment restrictive covenants, creating new potential liability for acts of unfair competition and civil violations. While existing law under California Business and Professions Code section 16600 (“Section 16600”) already voids post-employment noncompete agreements and certain other restrictive covenants, these new laws (1) reinforce the broad construction of Section 16600; (2) require employers to notify employees of void noncompete agreements by February 14, 2024; and (3) permit employees who successfully challenge a restrictive covenant to recover damages and attorney’s fees.

In response to these new laws, California employers may need to take several actions, including reviewing their agreements with California employees, issuing notices as appropriate, and revising their form agreements to avoid liability.

Below we summarize these developments, highlight potential challenges for California employers, and identify potential courses of action and various considerations for employers.

Existing California Law Voids Various Post-Employment Restrictive Covenants

California has a long-standing public policy favoring open competition and employee mobility, codified in Section 16600, which generally voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.”

Under Section 16600, California courts have found various post-employment restrictive covenants to be void and unenforceable, including:

• Covenants not to compete. Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 945 (2008).
• Covenants not to solicit a former employer’s customers. Id. at 948.
• Overly broad confidentiality provisions that operate as a “de facto” noncompete provision. Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, 318–19 (2020).
• Covenants not to solicit a former employer’s employees. AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., 28 Cal. App. 5th 923, 936 (2018).

Employers Must Notify California Employees of Void Noncompete Agreements by February 14, 2024, but What Constitutes a Noncompete Agreement?

California Assembly Bill No. 1076 amended Section 16600 and added Section 16600.1 to the California Business and Professions Code, which became effective on January 1, 2024. In particular, Section 16600 now expressly provides that it “shall be read broadly” in accordance with Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), which is not a change in, but declaratory, of existing law.

Section 16600.1 requires employers, by February 14, 2024, to notify to all current California employees and former California employees (employed any time after January 1, 2022) who had entered into a “noncompete agreement” (or other contract containing a “noncompete clause”) with the employer that such noncompete is now void. The notice must be in the form of an individualized written communication delivered to the last known address and email address of affected former and current employees. Section 16600.1 also makes it unlawful to require an employee to enter into a void noncompete agreement and establishes that a violation constitutes an act of unfair competition under California Business and Professions Code Section 17200, which provides for injunctive relief, restitution, and civil penalties.

Employers should also be aware that Section 16600.1 could trigger liability under other existing laws. For example, California Labor Code Section 432.5 prohibits employers from requiring employees to agree to any term or condition of employment that is known by the employer to be prohibited by law, and anyone who violates that section is guilty of a misdemeanor under California Labor Code section 433. Additionally, a violation of Labor Code Section 432.5 may also serve as the basis for a representative action under the California Private Attorneys General Act.

The challenge posed to employers by Section 16600.1 is that it does not define the terms “noncompete agreement” or “noncompete clause,” leaving employers unclear as to which restrictive covenants require notice to employees. However, given Section 16600’s express declaration that it should 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,” at a minimum, notice likely must be issued for express covenants not to compete and customer non-solicitation covenants, which Edwards concluded was a form of non-compete agreement. 44 Cal. 4^th at 948.

Particularly difficult for employers is the question of whether notice must be sent for overly broad confidentiality provisions and/or employee non-solicitation covenants. In concluding that an overly broad confidentiality provision violated Section 16600, the California Court of Appeal stated that “these overly restrictive provisions operate as a de facto noncompete provision.” Brown, 57 Cal. App. 5^th 319 (emphasis added). Brown’s use of the term “noncompete” suggests that employers may need to issue notice for an overly broad confidentiality provision, but determining whether a confidentiality provision is overly broad presents a very fact-intensive issue.

With respect to employee non-solicits, beginning with AMN Healthcare in 2018, a number of court decisions have concluded that such restrictive covenants violate Section 16600, while recognizing that there is a current split of authority under California law. See, e.g., AMN Healthcare, 28 Cal. App. 5^th at 937-39 (discussing Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985), which concluded that an employee non-solicit was not void under Section 16600); Barker v. Insight Global, LLC, 2019 WL 176260 (N.D. Cal. Jan. 11, 2019); Six Dimensions, Inc v. Perficient, 969 F.3d 219, 229 (5^th Cir. 2020) (“Our best Erie guess is that the California Supreme Court would hold that California’s strict antipathy towards restraint of trade of any kind in Section 16600 voids the nonsolicitation provision here.”). Accordingly, the enforceability of employee non-solicits remains an open question until the California Supreme Court resolves the current conflict. Further, if the California legislature had wanted to make employee non-solicits void, it could have expressly done so in this legislation and expressly referenced AMN Healthcare, as it did with Edwards v. Arthur Andersen. That it did not and that Section 16600.1 expressly refers to “noncompete agreement” and “noncompete clause,” while Section 16600 refers to a “contract by which anyone is restrained from engaging in a lawful profession, trade, or business” and Section 16600.5 refers to a “contract that is void under this chapter,” suggests that the legislature intentionally distinguished between various forms of restrictive covenants in enacting Section 16600.1.

California Employees May Now Seek Damages and Attorney’s Fees for Enforcing Section 16600

California Senate Bill No. 699 added Section 16600.5 to the California Business and Professions Code, which also became effective on January 1, 2024. Section 16600.5 provides that employers commit a civil violation by entering into or attempting to enforce a void restrictive covenant and creates a private right of action for California employees to seek injunctive relief, damages, and attorney’s fees in enforcing California’s prohibition against unlawful restrictive covenants. Thus, whereas employees could previously seek only declaratory relief with respect to void restrictive covenants under Section 16600, they will now be able to seek additional forms of relief, increasing the potential liability for California employers entering into or attempting to enforce void restrictive covenants.

Employers should also note that Section 16600.5 expressly provides that any void contract is unenforceable regardless of where and when the contract was signed, creating the potential for various jurisdictional issues. For example, employees who entered into a noncompete in a state outside of California may relocate to California in an attempt to void their noncompete agreement. Or, employees who are located in a state outside of California and entered into a noncompete with a California employer may seek to invalidate the noncompete in their home state under Section 16600.5. Such tactics could also potentially lead to parallel proceedings in California and the state where an employee entered into a noncompete and/or performed their work. Employers will need to continue monitoring developments in this area of the law as courts start to grapple with these issues.

What Can Employers Do?

There are numerous options available to employers for taking action in response to these new laws, including the following or combination thereof:

• Review agreements with California employees to identify those who must be notified of any void noncompete and/or non-solicitation covenants.
• At a minimum, notify affected employees that any express noncompete and/or customer non-solicitation covenants are void.
• Determine whether to also notify affected employees of any overly broad confidentiality provisions and/or employee non-solicitation covenants that are void.
• Revise forms of affected agreements for use going forward. At a minimum, this should include removing any express noncompete and/or customer non-solicitation covenants. A more conservative approach would also include revising overly broad confidentiality provisions and/or removing employee non-solicitation covenants. Arguably, no action is required, unless and until the California Supreme Court decides whether employee non-solicitation covenants are void under Section 16600, but doing nothing creates exposure to potential litigation and/or additional liability under the new statutes.

Determining which action(s) to take will require consideration of the restrictive covenant at issue, the employer’s risk tolerance, and consultation with counsel.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Eric Amdursky, an O’Melveny partner licensed to practice law in California; Ramon Ramirez, an O’Melveny counsel licensed to practice law in California; Susannah K. Howard, an O’Melveny partner licensed to practice law in California and New York; Adam Karr, an O’Melveny partner licensed to practice law in California and Utah; and Adam P. KohSweeney, an O’Melveny partner licensed to practice law in California and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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