California Further Tightens Restrictions on Noncompetes

Since 1892, California has declared noncompetes agreements unenforceable except in narrow and limited circumstances. The recent passage of Assembly Bill (AB) 1076 further tightens the state’s restrictions on noncompete agreements. Governor Gavin Newsom signed the bill into law on October 13, 2023, and it will be effective as of January 1, 2024, reports Greenberg Traurig on their L & E blog.

• AB 1076 codifies the existing caselaw established in Edwards v. Arthur Andersen, LLP, in 2008. Edwards held that the existing noncompete statute prohibits even narrowly drawn noncompetition agreements unless they fall within a statutory exception. This codification makes it even more challenging for courts to deviate from the Edwards precedent.
• The bill makes it “unlawful to include a noncompete clause in an employment contract or require an employee to enter a noncompete agreement” unless a narrow exception applies. This shift transforms the previous status of noncompete agreements into acts of unfair competition, with employers subject to civil penalties of up to $2,500 per violation.
• AB 1076 extends the reach of noncompete restrictions to contracts where the restrained party may not even be a direct party to the agreement. Although the language is not entirely clear, it could be read so that agreements between contracting parties restraining a third party, such as business-to-business contracts prohibiting the hiring of each other’s employees, are banned.
• A notice requirement mandates that employers have until February 14, 2024, to notify California employees who were employed after January 1, 2022, and were subject to noncompliant noncompete clauses, that their noncompetes are void.

Employers, whether within or outside of California, now face increased compliance burdens and potential liability. They will need to audit their employment agreements and ensure that noncompliant noncompete clauses are promptly addressed.