Non-Compete Agreements and Employment Law

In 2023, certain sections of the California Business and Professions Code were amended, voiding many non-compete agreements and potentially impacting certain non-solicitation agreements.

Prior to 2023, it was well-established under California law that, with certain exceptions (including the protection of trade secrets or in connection with the sale of a business or the dissolution of a partnership), non-compete agreements were void as an anti-competitive restraint of “profession, trade, or business.” (B&P Code § 16600(a))

The recent amendments plugged a number of potential loopholes. Subdivision (b) codifies case law that stands for the proposition that limitations such as time and geography do not validate a non-compete agreement.

Subdivision (c) provides that the law is not “limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract.” In other words, the law contemplates business to business contracts which restrain an employee who is not a party to the contract. For example, a non-solicitation agreement between business A and business B which provides for liquidated damages in the event that one hires the other’s former employee is likely void under section 16600 to the extent that the increased cost the potential employer would have to pay deters it from hiring that employee.

The amendments also clarify that non-compete agreements are unenforceable in California regardless of where they were signed. That means that if an employee signed a non-compete agreement with an out-of-state employer, that agreement would be void if the employee came to work in California and the former employer attempted to enforce the agreement against the employee or their new employer.

Finally, the law requires employers who included a non-compete clause in an agreement since January 2022, to issue individual written notices that the agreement is void by February 14, 2024, to each current employee and former employee affected. Attorney’s fees and a civil penalty are available when an employee brings a successful lawsuit against employers in violation to void the agreement.