­California Opens its Doors to Commerce by Voiding Out-Of-State Non-Compete Agreements
­California Opens its Doors to Commerce by Voiding Out-Of-State Non-Compete Agreements

You may have heard the half-serious joke that California acts as its own independent country.  One example of this is California’s strong disfavor of non-compete agreements, which stands in contrast with the rest of the country which permits these agreements to varying degrees.

California has leaned further into its famed independence with the passage of Senate Bill 699, which will go into effect on January 1, 2024.  SB 699 seeks to strengthen California’s existing ban against non-compete agreements set forth in Business and Professions Code section 16600 which simply states that, outside of certain sale-of-the-business situations, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  SB 699 will add section 16600.5 to the Business and Professions Code and prohibit an employer or former employer from seeking to enforce a non-compete contract that is void under section 16600 regardless of whether the employee worked outside of California and regardless of where the agreement was signed

SB 699 will mean that an employee living and working in Texas who signs an enforceable non-compete agreement under Texas law with a Texas employer, could move to California to open or work for a competing business.  The Texas non-compete agreement would be void and unenforceable in California.  Not only would the non-compete agreement be void, but the former employee would be entitled to bring a private civil action against the employer if it attempts to enforce the non-compete agreement.  If the employee prevails, he or she would be entitled to recover injunctive relief or actual damages, or both, and reasonable attorney’s fees and costs.

Ultimately, SB 699 may not change things much for California employers.  Non-compete agreements have been in disfavor in this state long enough so that many businesses forego such restrictions in favor of narrowly tailored non-solicitation and trade secrets provisions.  Rather, the significance of the new law is its impact on businesses in other states.  Indeed, the purpose of the bill is to breathe new life into California’s business climate by permitting competing businesses in California to make hiring decisions that would otherwise have been restricted in another state.

Even so, SB 699 may be challenged on constitutional grounds.  For example, states are generally limited in their ability to enact laws that impose a substantial burden on interstate commerce.  A state law that places an undue burden that exceeds the local benefits of the law runs afoul of the “dormant commerce clause.”  (Pike v. Bruce Church, Inc. (1970) 397 U.S. 142.)  In the face of such a challenge, California will likely argue that SB 699 frees commerce by allowing employees to freely practice their trade or profession, and thus there is no constitutional threat.  Another possible challenge is that California’s new law appears to infringe on each other states’ independent right to enact and enforce its own laws.  Suffice it to state that SB 699 will be subject to scrutiny by the federal courts. 

Pending the results of a challenge on the enforceability of SB 699, both in-state and out-of-state businesses should be extremely wary of any attempt to enforce non-compete agreements against employees residing in California.  In addition, employers should continue to keep an eye on the Federal Trade Commission’s proposed ban on non-compete agreements.  If this passes, it would halt non-competes in employment agreements nationwide, putting the rest of the nation on the same footing as California employers.  A vote on the ban is not expected to take place until April of 2024. 

This publication is published by the law firm of Ervin Cohen & Jessup LLP. The publication is intended to present an overview of current legal trends; no article should be construed as representing advice on specific, individual legal matters. Articles may be reprinted with permission and acknowledgment. ECJ is a registered service mark of Ervin Cohen & Jessup LLP. All rights reserved.



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