New California Laws Provide Private Right of Action for Unlawful Restrictive Covenants; Require Notice to Affected Employees by February 14, 2024

Key Points

• New California statutes provide California employees with private right of action against firms that promulgate, maintain or try to enforce unlawful restrictive covenants.
• By February 14, 2024, firms must provide employees with notice that such covenants are void.
• Notice must go to current employees and former employees who have departed since January 1, 2022.

Discussion

In California’s latest salvo against restrictive covenants, the state has enacted Assembly Bill No. 1076 (AB 1076) and Senate Bill No. 699 (SB 699), amending California’s Business and Professions Code (BPC) regarding Contracts in Restraint of Trade. The new laws, which became effective January 1, 2024, amend BPC §§ 16600 et seq. in several important ways:

Broad Definition of “Noncompete”

First, AB 1076 codifies the California courts’ broad definition of “noncompete” agreements to include provisions barring the post-employment solicitation of a firm’s clients. The statute makes clear that “[t]his section shall be read broadly, in accordance with” the California Supreme Court’s decision in Edwards v. Arthur Anderson LLP, 44. Cal. 4th 937 (2008), which found a client non-solicitation provision to be invalid under BPC § 16600. The status of post-employment employee non-solicitation restrictions is less clear, but these provisions also potentially are covered by the statute.

Current and Future Agreements

Second, the scope of contracts covered by the new laws also is broad. Agreements containing impermissible covenants are “unenforceable regardless of where or when the contract was signed” (BPC § 16600.5(a)), and regardless of whether “the employment was maintained outside of California” (BPC § 16600.5(b)). SB 699 (i) prohibits firms from “enter[ing] into a contract with an employee or prospective employee that includes a provision that is void under this chapter” (BPC § 16600.5(c)), (ii) provides that “[a]ny contract that is void under this chapter is unenforceable regardless of where and when the contract was signed” (BPC § 16600.5(a)) and (iii) provides that “[a]n employer that enters into a contract that is void under this chapter or attempts to enforce a contract that is void under this chapter commits a civil violation” (BPC § 16600.5(d)).

One open question is how the new statutes interact with California Labor Code Section 925 (“Section 925”), which permits a California-based employee to agree to the application of another state’s laws, and to the resolution of disputes in another state’s forums, in agreements on which the employee was represented by counsel. See Cal. Lab. Code § 925(e). Where applicable, Section 925 seems to authorize agreements to elect another state’s laws regarding restrictive covenants. And AB 1076 and SB 699 do not cross-reference Section 925, so arguably leave its application to restrictive covenants intact. At the same time, the broad language of AB 1076 and SB 699—and, in particular, SB 699’s application to contracts regardless of where and when executed and/or whether employment was maintained in California­—casts some doubt on that conclusion.

Required Notice to Current and Former Employees

Third, and most pressing from a timing perspective, AB 1076 requires firms to provide written notice to employees subject to unlawful provisions, and former employees who were subject to such provisions and who were employed at any time after January 1, 2022, “that the noncompete clause or noncompete agreement is void.” Such notice is due by February 14, 2024. See BPC § 16600.1(b)(1). This notice must “be in the form of a written individualized communication to the employee or former employee, and … be delivered to the last known address and the email address of the employee or former employee.” See BPC § 16600.1(b)(2).

Private Right of Action

Fourth, and perhaps most importantly, the new laws provide affected employees with a private right of action against firms that include prohibited covenants in their agreements, seek to enforce such provisions or maintain such provisions without providing the required notice noted above. See BPC § 16600.1(c); BPC § 16600.5(e). “A violation of” AB 1076 “constitutes an act of unfair competition” under the California Business and Professions Code (see BPC § 16600.1(c)), and a current or former employee subject to an unlawful provision can bring a claim for injunctive relief, damages and reasonable attorneys’ fees and costs (see BPC § 16600.5(e)). This private right of action fundamentally changes firms’ risk-benefit analysis in including covenants in their agreements. The risk now is not simply that post-employment covenants will be deemed unenforceable—it’s that firms with unlawful covenants will face claims from affected current or former employees seeking attorneys’ fees and costs, among other remedies.

Exceptions

The new laws preserve the existing exceptions to California’s restrictive covenant laws, including those for partners in a partnership and members of a company and those in connection with the sale of a business.

Conclusion

Investment managers with operations in California should review the new statutes and consider whether they should issue notice to current and former employees prior to the February 14, 2024 deadline. Firms also should consider their use of covenants with California-based employees in the future.