Historically, common law allowed contractual restraints on lawful business practices, so long as they were reasonable. However, in 1872, California opted to impose stricter limitations on such contractual restraints, instead opting to favor policy that would support competition in trade. This decision resulted in the enactment of Civil Code Section 1673, subsequently renumbered and moved to Business and Professions Code Section 16600.

Section 16600 states “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Subject to various statutory exceptions, the impact of this section is to invalidate any attempt at a noncompete agreement (or a contract in restraint of trade) that would improperly prohibit individuals from engaging in a lawful business.

There is extensive case law on this matter, but one case in particular has cemented the prohibition on noncompete clauses in California. In Edwards v. Arthur Andersen LLP, the California Supreme Court held that “[n]oncompetition agreements are invalid under section 16600 in California, even if narrowly drawn, unless they fall within the applicable statutory exceptions[.]” (Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937, 955 (2008).)

On September 1, Governor Gavin Newsom signed S.B. 699, a new law that strengthens existing California law that voids contracts which restrain anyone from engaging in a lawful profession, trade, or business of any kind. The new provisions take effect on January 1, 2024.

Existing Law:

– – Provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is void, subject to limited exceptions. (Business & Professions Code Section 16600.)
– – Provides that any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells specified assets or interests may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business is sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein. (Business and Professions Code section 16601.)
– – Defines “ownership interest” to mean a partnership interest, a membership interest, or a capital stockholder, as specified. (Business and Professions Code section 16601.)
– – Establishes the Division of Labor Standards and Enforcement, of which the state Labor Commissioner is chief, to ensure that minimum labor standards are adequately enforced. (Labor Code Sections 82 and 90.5.)

New Law

S.B. 866 aims to strengthen and clarify existing restrictions on the use of noncompete agreements in four ways. First, it strengthens California’s restraint of trade prohibitions by making it clear that any contract that is void under California’s restraint of trade law is unenforceable, regardless of where and when the contract was signed.

Second, the new law prohibits an employer or former employer from attempting to enforce a contract that is void under California’s restraint of trade law.

Third, the new law prohibits an employer from entering into a contract with an employee or prospective employee that includes a provision that is void under restraint of trade law.

Fourth, the new law provides that an employer who enters into a contract that is void under California’s restraint of trade law or attempts to enforce a contract that is void under California’s restraint of trade law commits a civil violation.

The law provides robust mechanisms for the enforcement of these provisions. The bill allows an employee, former employee, or prospective employee may bring an action to enforce these provisions for injunctive relief or the recovery of actual damages, or both. A prevailing employee, former employee, or prospective employee is also entitled to recover reasonable attorney’s fees and costs.

The California Employment Lawyers Association, was in support of SB 699, as it explained that, “although noncompete clauses have been unlawful in California since 1872, our attorneys routinely see these clauses included in employment agreements with California employees.”

Dozens of law professors from law schools across the nation provided a letter of joint support for the bill.

There was no report of any opposition to the passage of S.B. 699.