California has strengthened its stance against non-compete agreements with the signing of an amendment to the state's non-compete ban, known as S.B. 699. The amendment, which takes effect on January 1, 2024, declares non-compete agreements void regardless of when or where they are signed, including those signed outside of California. S.B. 699 also introduces a new private cause of action, allowing employees to take legal action against employers who use unenforceable non-competes as a deterrent. However, there are still unanswered questions surrounding the amendment, including its impact on Labor Code §925, and its potential retroactivity. Employers, both within and outside of California, should carefully review their use of restrictive covenants in light of these developments.

California has long prohibited most post-employment restrictive covenants through statute (Bus. & Prof. Code §16600 et seq.). Over time, California courts have expanded this ban to include post-employment customer non-solicitation provisions. It is widely understood that §16600 applies to all individuals working in California, even if they work for an out-of-state employer.

S.B. 699 solidifies these understandings and goes further by clarifying that the ban on restrictive covenants applies regardless of where the contract was signed or whether the employment was based outside of California. For example, a Nevada employer would violate §16600.5 by requiring its California-based employee to sign a non-compete. With the enactment of S.B. 699, that same Nevada employer would also violate the amendment if they tried to enforce the non-compete when the employee begins working for a California-based employer, even if the employee remains in Nevada.

S.B. 699 also condemns the practice of California employers having employees sign non-compete clauses that are clearly void under California law. The amendment declares any contract with impermissible restrictive covenants unenforceable and allows employees to bring a private action for injunctive relief and damages. Successful plaintiffs can recover reasonable attorneys' fees and costs without proving harm.

However, there are still unanswered questions surrounding S.B. 699. It does not explicitly address its impact on Labor Code §925, a choice of law statute enacted in 2017. This statute allows California employees to apply another state's governing law if represented by independent counsel during negotiations. Some employers have used this statute to import otherwise banned restrictive covenants into California-based employment agreements. The constitutionality of S.B. 699's long-arm reach and its potential impact on interstate commerce also remain uncertain. Additionally, it is unclear whether S.B. 699 will eventually target restraints imposed during employment.

Practice Pointers for Businesses:

1. Assess your use of restrictive covenants: In light of S.B. 699, it is crucial for employers to critically evaluate their deployment of restrictive covenants. Consider whether these agreements are necessary and enforceable under California law. Be aware that S.B. 699 applies not only to California-based employers but also to employers outside of the state.

2. Review existing agreements: Take the time to review existing agreements with employees and remove any unenforceable restrictive covenants. Consider providing written acknowledgement of the unenforceability of these provisions to avoid potential legal consequences.

 3. Consider the potential retroactivity: While the retroactive effect of S.B. 699 is uncertain, it is prudent to anticipate potential challenges to previously signed agreements. Stay informed about any developments in subsequent litigation that may shed light on the retroactive nature of the amendment.

4. Be aware of Federal constitutional issues: S.B. 699's long-arm reach, which allows California employers to invalidate non-California restrictive covenants, may raise Federal constitutional concerns regarding interstate commerce. Be prepared for potential legal challenges and monitor subsequent litigation for guidance on the enforceability of this provision.

5. Monitor developments regarding fiduciary obligations: While S.B. 699 primarily targets post-termination restraints, there is uncertainty surrounding whether restraints imposed during employment will be the next focus. Stay updated on any legislative or judicial developments that may impact fiduciary obligations and non-compete agreements during employment.

6. Seek legal counsel: Given the complexity and potential legal implications of S.B. 699, it is advisable to consult with legal counsel specializing in employment law. They can provide guidance specific to your business and help navigate the evolving landscape of non-compete agreements in California.

While S.B. 699 strengthens California's non-compete ban and gives employees more power to challenge unenforceable agreements, there are still questions surrounding its impact on other statutes, its constitutionality, and its potential expansion to restraints during employment. Employers should carefully review their use of restrictive covenants in light of these developments.

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