Existing law regulates business activities in order to maintain competition. Existing law voids contractual provisions by which a person is restrained from engaging in a lawful profession, trade, or business of any kind, except as otherwise provided.

This bill would establish that any contract that is void under the law described above is unenforceable regardless of where and when the contract was signed. The bill would prohibit an employer or former employer from attempting to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California.

The bill would prohibit an employer from entering into a contract with an employee or prospective employee that includes a provision that is void under the law described above. The bill would establish that an employer who violates that law commits a civil violation. The bill would authorize an employee, former employee, or prospective employee to bring an action to enforce that law for injunctive relief or the recovery of actual damages, or both, and would provide that a prevailing employee, former employee, or prospective employee is entitled to recover reasonable attorneys fees and costs.

The bill would also make a related statement of legislative findings and declarations.

Existing law regulates business activities in order to maintain competition. Existing law voids contractual provisions by which a person is restrained from engaging in a lawful profession, trade, or business of any kind, except as otherwise provided.

This bill would establish that any contract that is void under the law described above is unenforceable regardless of where and when the contract was signed. The bill would prohibit an employer or former employer from attempting to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California.

The bill would prohibit an employer from entering into a contract with an employee or prospective employee that includes a provision that is void under the law described above. The bill would establish that an employer who violates that law commits a civil violation. The bill would authorize an employee, former employee, or prospective employee to bring an action to enforce that law for injunctive relief or the recovery of actual damages, or both, and would provide that a prevailing employee, former employee, or prospective employee is entitled to recover reasonable attorneys fees and costs.

The bill would also make a related statement of legislative findings and declarations.

Existing law regulates business activities in order to maintain competition. Existing law voids contractual provisions by which a person is restrained from engaging in a lawful profession, trade, or business of any kind, except as otherwise provided.

This bill would establish that any contract that is void under the law described above is unenforceable regardless of where and when the contract was signed. The bill would prohibit an employer or former employer from attempting to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California.

The bill would prohibit an employer from entering into a contract with an employee or prospective employee that includes a provision that is void under the law described above. The bill would establish that an employer who violates that law commits a civil violation. The bill would authorize the Attorney General to bring an action to enforce that law. The bill would authorize an employee, former employee, or prospective employee to bring an action to enforce that law for injunctive relief or the recovery of actual damages, or both, and would provide that a prevailing employee, former employee, or prospective employee is entitled to recover reasonable attorneys fees and costs.

The bill would also make a related statement of legislative findings and declarations.

Existing law regulates business activities in order to maintain competition. Existing law voids contractual provisions by which a person is restrained from engaging in a lawful profession, trade, or business of any kind, except as otherwise provided.

This bill would establish that any contract that is void under California law the law described above is unenforceable regardless of where and when the contract was signed. The bill would prohibit an employer or former employer from enforcing attempting to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California.

The bill would prohibit an employer from entering into a contract that presents with an employee or prospective employee as a term of employment, or attempting to enforce any contract that is void, as described. that includes a provision that is void under the law described above. The bill would establish that an employer who violates that provision that law commits a civil violation. The bill would authorize the Attorney General to bring an action on behalf of the employee, or the employee to bring a private action, against the employer. to enforce that law. The bill would authorize an employee employee, former employee, or prospective employee to bring an action to enforce that law for injunctive relief and for relief or the recovery of actual damages and penalties damages, or both, and would provide that a prevailing employee employee, former employee, or prospective employee is entitled to recover reasonable costs and attorneys fees. attorneys fees and costs.

The bill would also make a related statement of legislative findings and declarations.

Existing law regulates business activities in order to maintain competition. Existing law voids contractual provisions by which a person is restrained from engaging in a lawful profession, trade, or business of any kind, except as otherwise provided.

This bill would make a nonsubstantive change in the above-described provisions regarding contracts that would restrain engaging in lawful activities.

Date of Hearing: July 5, 2023

ASSEMBLY COMMITTEE ON JUDICIARY

Brian Maienschein, Chair

SBPCA Bill Id:SB 699

Author:(Caballero) – As Amended Ver:May 18, 2023

PROPOSED CONSENT

SENATE VOTE: 40-0

SUBJECT: CONTRACTS IN RESTRAINT OF TRADE

KEY ISSUE: SHOULD CALIFORNIA’S RESTRAINT OF TRADE PROHIBITIONS BE STRENGTHENED BY CLARIFYING THAT ANY CONTRACT THAT IS VOID UNDER CALIFORNIA’S RESTRAINT OF TRADE LAW IS UNENFORCEABLE IN CALIFORNIA, REGARDLESS OF WHERE AND WHEN THE CONTRACT WAS SIGNED?

SYNOPSIS

California law has long codified that contracts are void if they restrain anyone from engaging in a lawful profession, trade, or business of any kind. Noncompete agreements in employment contracts are void under this law. Nevertheless, noncompete agreements, or contracts that prohibit someone from engaging in competition against the employer, affect nearly 20% of workers nationwide, with somewhere between 30 – 46% of workers in the private sector being subject to such agreements.

This author-sponsored bill aims to strengthen and clarify existing restrictions on the use of noncompete 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 bill prohibits an employer or former employer from attempting to enforce a contract that is void under California’s restraint of trade law. Third, the bill 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 bill 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 bill 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. The bill was recently unanimously approved by the Assembly Labor and Employment Committee and is supported by California Employment Lawyers Association, Maravai Lifesciences, and dozens of law school professors from around the nation. It has no opposition on file.

SUMMARY: Strengthens California’s restraint of trade prohibitions by clarifying, among other things, that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed. Specifically, this bill:

1) Makes the following findings and declarations on behalf of the Legislature:

1. Noncompete clauses in employment contracts are extremely common in the United States. Research shows that one in five workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide. The research further shows that California employers continue to have their employees sign noncompete clauses that are clearly void and unenforceable under California law. Employers who pursue frivolous noncompete litigation has a chilling effect on employee mobility.
2. California’s public policy provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is, to that extent, void, except under limited statutory exceptions. California has benefited significantly from this law, fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development.
3. Over the past two decades, research on the harm of noncompete clauses and other contract clauses involving restraint of trade to pursue one’s profession has been accelerating. Empirical research shows that noncompete clauses stifle economic development, limit firms’ ability to hire and depress innovation and growth. Noncompete clauses are associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.
4. Recent years have shown that employers utilizing broad noncompete agreements attempt to subvert this longstanding policy by requiring employees to enter void contracts that impact employment opportunities once an employee has been terminated from the existing employer. Moreover, as the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.
5. The California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.
6. California has a strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence. This freedom of employment is paramount to competitive business interests.
7. Provides that any contract that is void under California law is unenforceable regardless of where and when the contract was signed.
8. Prohibits an employer or former employer from attempting to enforce a contract that is void under California law, regardless of whether the contract was signed and the employment was maintained outside of California.
9. Prohibits an employer from entering into a contract with an employee or prospective employee that includes a provision that is void under California law.
10. Establishes that an employer that enters into a contract that is void under California law or attempts to enforce a contract that is void commits a civil violation.
    1. Allows an employee, former employee, or prospective employee to bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages, or both.
    2. In addition to the remedies described in paragraph a), a prevailing employee, former employee, or prospective employee in an action based on a violation of this chapter shall be entitled to recover reasonable attorney’s fees and costs.

EXISTING LAW:

1. 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.)
2. 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.)
3. Defines “ownership interest” to mean a partnership interest, a membership interest, or a capital stockholder, as specified. (Business and Professions Code section 16601.)
4. Establishes the State Bar Act that provides for the licensure and regulation of attorneys by the State Bar of California. (Business and Professions Code section 6000 et seq.)
5. 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.)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: This author-sponsored bill strengthens California’s restraint of trade prohibitions by clarifying, among other things, that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed. According to the author:

Despite California’s strong laws and public policy against noncompetition agreements, companies that do business in California continue to attempt to enforce noncompete agreements against California residents. As the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees. Employers who pursue frivolous noncompete litigation can have a chilling effect on employee mobility. SB 699 seeks to strengthen penalties for employers who attempt to utilize non-competes, making them liable for actual damages and penalties. The bill would also authorize a prospective employee to bring an action for injunctive relief and for the recovery of those damages and penalties, and would provide that a prevailing employee is entitled to recover reasonable costs and attorney’s fees.

Background - Noncompete agreements. Noncompete agreements, or contracts that prohibit someone from engaging in competition against the employer, affect nearly 20% of workers nationwide, with somewhere between 30 – 46% of workers in the private sector being subject to such agreements. (Alexander J.S. Colvin and Heidi Shierholz, Noncompete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights, Economic Policy Institute (Dec. 10, 2019), available at: https://www.epi.org/publication/noncompete-agreements/.) Critics of noncompete agreements argue that they not only harm workers by limiting their employment options or mobility, but also harm businesses by contributing to “brain drain” and forcing talent to relocate to jurisdictions where noncompete agreements are unenforceable. (https://hbswk.hbs.edu/item/non-competes-push-talent-away.) Noncompete agreements arising after an employee has left the employer seeking to enforce the agreement have largely been held to be contrary to public policy and therefore unenforceable under California law. The approach has recognized the inherent power dynamic between workers and their employers, and that employers should not be authorized to restrict an individual from engaging in what would otherwise be lawful economic activity.

Akin to the issue of noncompete agreements, training repayment agreements (TRAs), also called training repayment agreement provisions (TRAPs), refer to contracts between an employer and employee requiring the employee to pay for training programs if the employee elects to leave their job before a set date. While the programs are often presented as well-intentioned opportunities for professional growth, they can often create a breeding ground for poor working conditions. For example, a worker who is desperate for any job due to mounting debt may seize an opportunity to work in a position that also offers them job-related training. On its face, this offer would seem ideal – the job provides economic stability and potential for professional growth. However, a TRA includes a clause in the employment contract that requires the worker to stay for a specified period of time or otherwise shoulder the financial burden of the training. In the event the worker begins to experience workplace harassment or abuse, they would ultimately be faced with the decision of staying despite the negative conditions or leaving but having to assume potentially significant debt.

Proponents of these programs argue that the requirement for employees to stay for a certain period of time is necessary in order to stave off economic loss and lessen the burden of costly turnover. Opponents, on the other hand, compare such programs to indentured servitude. (Karla L. Miller, Work Advice: training debt can keep employees trapped at jobs, The Washington Post February 9, 2023 available at: https://www.washingtonpost.com/business/2023/02/09/training-repayment-agreement-worker-debt/.)

History, Case Law, and Statutory Law Governing Noncompete Agreements. Common law allowed contractual restraints on lawful business practices, so long as they were reasonable. (Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284.) 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. 4^th 937, 955 (2008).)

While Edwards v. Arthur Andersen has largely been viewed as the final determination regarding the invalidity of noncompete clauses imposing restrictions on employees after leaving the employer, case law has also determined that noncompete clauses imposing restrictions on employees during their time with the employer are not as undeniably void. So while the Legislature and courts have reliably established that noncompete agreements limiting employees’ opportunities after leaving their employer are void as a matter of public policy and therefore unenforceable, they have not said the same regarding such agreements affecting an employee’s limitations during employment.

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

ARGUMENTS IN SUPPORT: The California Employment Lawyers Association, in support of SB 699, explains that, “although noncompete clauses have been unlawful in California since 1872, our attorneys routinely see these clauses included in employment agreements with California employees. These clauses restrict workers from freely switching jobs, which lowers overall wages, and undermines fair competition. These clauses can have a significant chilling effect on workers who may not understand that such agreements are void under California law.”

Dozens of law professors from law schools across the nation write in a letter of joint support for the bill that it will be helpful in spurring economic growth in California and across the nation.

In California, innovation, entrepreneurship and industry growth have all flourished thanks to a highly mobile workforce. For example, variations in state noncompete law have likely contributed to the fact that alumni of Google (based in noncompete-banning California) have been far more prolific than alumni of Microsoft and Amazon (based in noncompete-enforcing Washington state) in starting their own companies and raising capital. In 2016, the U.S. Treasury Department issued a report on noncompetes, finding that increased mobility “raise[s] labor productivity by achieving a better matching of workers and firms, and may facilitate the development of industrial clusters like Silicon Valley.” California’s policy on talent mobility is more than a worker’s rights policy – it is good for business, market competition, innovation and regional development. . . .The bill . . .strengthens California’s longstanding policy which has been an important contributor to the state’s prospering tech, entertainment, biomedicine, pharma, and other thriving industries.

Pending Similar Legislation: AB 1076 (Bauer-Kahan, 2023) codifies the case of Edwards v. Arthur Andersen LLP (2008) 44 Cal.4^th 937, providing that noncompete agreements in an employment context and noncompete clauses within employment contracts are void, even if the agreements are narrowly tailored, unless an exception applies.

REGISTERED SUPPORT / OPPOSITION:

Support

California Employment Lawyers Association
Maravai Lifesciences

Opposition

None on file

Analysis Prepared by: Alison Merrilees / JUD. / (916) 319-2334

Date of Hearing: June 28, 2023

ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT

Ash Kalra, Chair

SBPCA Bill Id:SB 699

Author:(Caballero) – As Amended Ver:May 18, 2023

SENATE VOTE: 40-0

SUBJECT: Contracts in restraint of trade

SUMMARY: Provides that any contract void under provisions relating to the prohibition on contracts in restraint of trade in employment are unenforceable, including by an employer or former employer. Authorizes an employee, as specified, to bring a private action to enforce this provision.

Specifically, this bill:

1. Makes findings and declarations regarding the negative impacts of noncompete clauses in employment contracts including stifling economic development, suppressing wages, and exacerbating the racial and gender pay gap.
2. States that any contract void under provisions relating to the prohibition on contracts in restraint of trade in employment is unenforceable, including by an employer or former employer, regardless of where and when the contract was signed.
3. Prohibits an employer from entering into a contract with an employee or prospective employee that includes a provision that is void as an unlawful restraint of trade.
4. Provides that it is a civil violation for an employer to violate 2) or 3) above.
5. Authorizes an employee, former employee, or prospective employee to bring a private action to enforce the above provisions for injunctive relief or the recovery of actual damages, or both. A prevailing employee, former employee, or prospective employee shall also be entitled to recover reasonable attorney’s fees and costs.

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. B&P Code § 16600.

FISCAL EFFECT: According to the Senate Committee on Appropriations,

Unknown court workload cost pressures to adjudicate civil actions brought by employees, former employees and prospective employees under the provisions of this bill (Trial Court Trust Fund, General Fund).

COMMENTS: Note: This measure is double referred to the Assembly Judiciary Committee upon passage out of this Committee.

In January 2023, the Federal Trade Commission (FTC) made headlines when it announced a proposed rule to ban noncompete clauses in contracts for employment. In its press release, the FTC noted that “companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives. In many cases, employers use their outsized bargaining power to coerce workers into signing these contracts. Noncompetes harm competition in U.S. labor markers by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.^[1]”

According to the author, “Noncompete clauses in employment contracts are extremely common in the United States. Research shows that 1 in 5 workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide. Despite California’s strong laws and public policy against noncompetition agreements, companies that do business in California continue to attempt to enforce noncompete agreements against California residents. As the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees. Employers who pursue frivolous noncompete litigation can have a chilling effect on employee mobility. SB 699 seeks to strengthen penalties for employers who attempt to utilize non-competes, making them liable for actual damages and penalties. The bill would also authorize a prospective employee to bring an action for injunctive relief and for the recovery of those damages and penalties, and would provide that a prevailing employee is entitled to recover reasonable costs and attorney’s fees.”

The author further states that the bill promotes economic equity because it “allows employees or potential employees to recover attorney’s fees and other related costs, which is sometimes the difference between pursuing litigation and not, for folks who do not have the means. SB 699 not only increases the incentives not to restrict employees’ freedom of movement in the employment sense, but also ensures benefits to employees who prevail, helping to recover for the time they were left unemployed due to the noncompete as well.”

Arguments in Support

The California Employment Lawyers Association (CELA) is in support and states, “CELA strongly supports SB 699 because although noncompete clauses have been unlawful in California since 1872, our attorneys routinely see these clauses included in employment agreements with California employees. These clauses restrict workers from freely switching jobs, which lowers overall wages, and undermines fair competition. These clauses can have a significant chilling effect on workers who may not understand that such agreements are void under California law.”

Arguments in Opposition

None on file.

Related Legislation

AB 747 (McCarty) of 2023 would provide for coordinated enforcement between the Attorney General (AG) and the Labor Commissioner (LC) for violations of the prohibition on contracts in restraint of trade in employment. Additionally would prohibit an employer from entering into a contract or a contract term that requires a debtor to pay for a debt if the debtor’s employment or work relationship with the employer is terminated, with limited exceptions. This bill is on the Assembly inactive file.

AB 1076 (Bauer-Kahan) of 2023 would codify existing case law by specifying that the prohibition on noncompete agreements is to be broadly construed to void noncompete agreements or clauses in the employment context that do not satisfy specified exceptions. Additionally would provide that a violation of the prohibition on noncompete agreements in employment constitutes unfair competition. The bill is pending a hearing in the Senate Judiciary Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Employment Lawyers Association
Maravai Lifesciences
Numerous Individuals

Opposition

None on file.

Analysis Prepared by: Megan Lane / L. & E. /

1. Federal Trade Commission, Press Release, “FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition,” January 5, 2023. ↑

 THIRD READING  

Bill No: SB 699

Author: Caballero (D)

Amended: 5/18/23

Vote: 21

SENATE JUDICIARY COMMITTEE: 11-0, 4/18/23

AYES: Umberg, Wilk, Allen, Ashby, Caballero, Durazo, Laird, McGuire, Min, Niello, Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/18/23

AYES: Portantino, Jones, Ashby, Bradford, Seyarto, Wahab, Wiener

SUBJECT: Contracts in restraint of trade

SOURCE: Author

DIGEST:

This bill strengthens the law that voids contracts which restrain anyone from engaging in a lawful profession, trade, or business of any kind.

ANALYSIS: Existing law specifies that every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. (Bus. & Prof. § 16600).

This bill:

1. Contains findings and declarations regarding noncompete clauses.
2. Provides that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed.
3. Provides that an employer or former employer shall not attempt to enforce a contract that is void under California’s longstanding restraint of trade law regardless of whether the contract was signed and the employment was maintained outside of California.
4. Provides that an employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under California’s restraint of trade law.
5. Provides that an employer that 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.
6. Provides that an employee, former employee, or prospective employee may bring an action for injunctive relief or the recovery of actual damages, or both, to enforce these provisions. And, provides that a prevailing employee, former employee, or prospective employee shall be entitled to recover reasonable attorney’s fees and costs.

Comments

California’s settled public policy in favor of open competition

As explained by the California Supreme Court^[1]:

Under the common law, as is still true in many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed. [citations omitted] This was true even in California. […] However, in 1872 California settled public policy in favor of open competition, and rejected the common law ”rule of reasonableness,” when the Legislature enacted the Civil Code. […]

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.” The chapter excepts noncompetition agreements in the sale or dissolution of corporations ( § 16601), partnerships (ibid.; § 16602), and limited liability corporations (§ 16602.5). […]

Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule (§ 16600.)

The author explains the following:

Noncompete clauses in employment contracts are extremely common in the United States. Research shows that 1 in 5 workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide. Despite California’s strong laws and public policy against noncompetition agreements, companies that do business in California continue to attempt to enforce noncompete agreements against California residents. As the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees. Employers who pursue frivolous noncompete litigation can have a chilling effect on employee mobility. SB 699 seeks to strengthen penalties for employers who attempt to utilize non-competes[.]

The California Employment Lawyers Association, in support of SB 699, explains that “although noncompete clauses have been unlawful in California since 1872, our attorneys routinely see these clauses included in employment agreements with California employees. These clauses restrict workers from freely switching jobs, which lowers overall wages, and undermines fair competition. These clauses can have a significant chilling effect on workers who may not understand that such agreements are void under California law.”

Strengthening California’s law in order to stop the use of noncompete clauses

Maravai LifeSciences, a supporter of this bill, explains that their “industry is heavily reliant on attracting top talent from across the country and around the world to continue driving innovation and economic growth. However, the use of noncompete clauses in employment contracts can hinder this process, preventing companies from recruiting the best candidates and limiting employee mobility. This is especially problematic in the biopharmaceutical industry, where the need for highly skilled workers with specialized knowledge is particularly acute.” As Maravai LifeSciences further explains, the “use of noncompete clauses in employment contracts, can have a chilling effect on employee mobility and stifle economic development. Research has shown that noncompete clauses limit firms’ ability to hire and depress innovation, growth, and are associated with suppressed wages and exacerbated racial and gender pay gaps.”

This bill 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. Additionally, the bill prohibits an employer or former employer from attempting to enforce a contract that is void under California’s restraint of trade law regardless of whether the contract was signed and the employment was maintained outside of California. Further, the bill 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. The bill also provides that an employer that 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 bill provides that 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.

Proponents believe that the enforcement mechanism and enhancements to the restraint of trade law will deter employers from pushing noncompete clauses into employment contracts and from threatening employees with lawsuits over contract provisions that are void.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

According to the Senate Appropriations Committee:

• Unknown court workload cost pressures to adjudicate civil actions brought by employees, former employees and prospective employees under the provisions of this bill (Trial Court Trust Fund, General Fund).

SUPPORT: (Verified 5/18/23)

California Employment Lawyers Association

California Hispanic Chambers of Commerce

Maravai LifeSciences

46 Law School Professors

OPPOSITION: (Verified 5/18/23)

None received

Prepared by: Margie Estrada / JUD. / (916) 651-4113

5/23/23 13:10:29

**** END ****

1. Edwards II, v. Arthur Andersen LLP (2008), 44 Cal. 4^th 937, 945-46. ↑

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

SB 699 (Caballero) - Contracts in restraint of trade

Bill Summary:

SB 699 would provide that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed and would subject an employer who enters into such a contract to liability in an action brought by the Attorney General or an employee, former employee, or prospective employee.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 18, 2023

Fiscal Impact:

• Unknown court workload cost pressures to adjudicate civil actions brought by employees, former employees and prospective employees under the provisions of this bill (Trial Court Trust Fund, General Fund).

Author Amendments:

Eliminate the authority of the Attorney General to enforce the provisions of the bill.

-- END --

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

SB 699 (Caballero) - Contracts in restraint of trade

Bill Summary:

SB 699 would provide that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed and would subject an employer who enters into a such a contract to liability in an action brought by the Attorney General or an employee, former employee, or prospective employee.

Fiscal Impact:

• DOJ: The Department of Justice (DOJ) reports ongoing costs of $442,000 in 2023-24 and $778,000 annually for 2.0 deputy attorneys general and 2.0 legal secretaries in the Public Rights Division in order to receive, review, investigate, and litigate complaints that are submitted under the bill (General Fund). Staff notes that the bill authorizes, but does not require, the DOJ to enforce its provisions.
  
• Judicial Branch: Unknown court workload cost pressures to adjudicate civil actions brought brought by the Attorney General or employees, former employees and prospective employees under the provisions of this bill (Trial Court Trust Fund, General Fund). See Staff Comments for additional detail.

Background:

A non-compete agreement is a legal agreement or clause in a contract specifying that an employee must not enter into competition with an employer after the employment period is over. These agreements can also prohibit the employee from revealing proprietary information or secrets to any other parties during or after employment. Noncompete clauses may specify a certain length of time when the employee is barred from working for a competitor after they end employment. Employers may require employees to sign non-compete agreements to keep their place in the market.

California law provides that contracts are void if they restrain anyone from engaging in a lawful profession, trade, or business of any kind. Noncompete agreements in employment contracts are void under this law. Noncompete agreements have been criticized as stifling economic development, limiting the ability to hire, and depressing innovation and growth.

Proposed Law:

• Provides that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed.
• Provides that an employer or former employer shall not attempt to enforce a contract that is void under California’s longstanding restraint of trade law regardless of whether the contract was signed and the employment was maintained outside of California.
• Provides that an employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under California’s restraint of trade law.
• Provides that an employer that 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.
• Provides that the Attorney General may bring an action to enforce the above provisions.
• Provides that an employee, former employee, or prospective employee may bring an action for injunctive relief or the recovery of actual damages, or both, to enforce these provisions. And, provides that a prevailing employee, former employee, or prospective employee shall be entitled to recover reasonable attorney’s fees and costs.

Related Legislation:

• AB 747 (McCarty, 2023) would provide, among other things, that an employer shall not enter into, present an employee or prospective employee as a term of employment, or attempt to enforce any contract in restraint of trade that is void under specified provisions of law. AB 747 is pending in the Assembly Judiciary Committee.
• AB 1076 (Bauer-Kahan, 2023) would codify the case of Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, which provides that noncompete agreements in an employment context and noncompete clauses within employment contracts are void, even if the agreements are narrowly tailored, unless an exception applies. AB 1076 is pending in the Assembly Labor and Employment Committee.

Staff Comments:

It is unknown how many court filings that would be generated by SB 699 that would not otherwise impact the courts. However, it generally costs about $1,000 to operate a courtroom for one hour. Although courts are not funded on the basis of workload, increased staff time and resources may create a need for increased funding for courts from the General Fund (GF) to perform existing duties. Numerous trial court operations are funded through the imposition and collection of criminal fines and fees. However, the Legislature has reduced and eliminated criminal fines and fees over the past decade. As a result, the 2023-24 proposed budget anticipates an ongoing annual allocation of $109.3 million from the GF to backfill declining revenue to the Trial Court Trust Fund.

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SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2023-2024 Regular Session

Bill No: SB 699 (Author:Caballero)

Version: April 10, 2023

Hearing Date: April 18, 2023

Fiscal: Yes

Urgency: No

Consultant: ME

SUBJECT

Contracts in restraint of trade

DIGEST

This bill strengthens the law that voids contracts which restrain anyone from engaging in a lawful profession, trade, or business of any kind.

EXECUTIVE SUMMARY

California has long codified that contracts are void if they restrain anyone from engaging in a lawful profession, trade, or business of any kind. Noncompete agreements in employment contracts are void under this law. Legal scholars who wrote in support of this bill note that studies “show that noncompetes stifle economic development, limit firms’ ability to hire and depress innovation and growth.” The scholars assert that noncompetes are associated with “reduced entrepreneurship, job growth, firm entry, and innovation.” They explain that “research further shows that the harms of noncompetes extend not only to employees but to also companies and regional innovation.” Despite California’s strong public policy against noncompete agreements, companies that do business in California continue to attempt to enforce noncompete agreements against California residents. The author seeks to stop this practice by strengthening restraint of trade law and providing a robust enforcement mechanism against those who violate these provisions.

The bill is author sponsored and supported by Miravai LifeSciences, the California Employment Lawyers Association, and a number of law school professors. There is no opposition to the bill.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Specifies that every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. (Bus. & Prof. § 16600).

This bill:

1. Contains findings and declarations regarding noncompete clauses.
2. Provides that any contract that is void under California’s restraint of trade law is unenforceable regardless of where and when the contract was signed.
3. Provides that an employer or former employer shall not attempt to enforce a contract that is void under California’s longstanding restraint of trade law regardless of whether the contract was signed and the employment was maintained outside of California.
4. Provides that an employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under California’s restraint of trade law.
5. Provides that an employer that 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.
6. Provides that the Attorney General may bring an action to enforce the above provisions.
7. Provides that an employee, former employee, or prospective employee may bring an action for injunctive relief or the recovery of actual damages, or both, to enforce these provisions. And, provides that a prevailing employee, former employee, or prospective employee shall be entitled to recover reasonable attorney’s fees and costs.

COMMENTS

1. California’s settled public policy in favor of open competition

As explained by the California Supreme Court^[1]:

Under the common law, as is still true in many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed. [citations omitted] This was true even in California. […] However, in 1872 California settled public policy in favor of open competition, and rejected the common law ”rule of reasonableness,” when the Legislature enacted the Civil Code. […]

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.” The chapter excepts noncompetition agreements in the sale or dissolution of corporations ( § 16601), partnerships (ibid.; § 16602), and limited liability corporations (§ 16602.5). […]

Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule (§ 16600.)

The author explains the following:

Noncompete clauses in employment contracts are extremely common in the United States. Research shows that 1 in 5 workers are currently subject to a noncompete clause out of approximately 30 million workers nationwide. Despite California’s strong laws and public policy against noncompetition agreements, companies that do business in California continue to attempt to enforce noncompete agreements against California residents. As the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees. Employers who pursue frivolous noncompete litigation can have a chilling effect on employee mobility. SB 699 seeks to strengthen penalties for employers who attempt to utilize non-competes[.].

The California Employment Lawyers Association, in support of SB 699, explains that “although noncompete clauses have been unlawful in California since 1872, our attorneys routinely see these clauses included in employment agreements with California employees. These clauses restrict workers from freely switching jobs, which lowers overall wages, and undermines fair competition. These clauses can have a significant chilling effect on workers who may not understand that such agreements are void under California law.”

2. Strengthening California’s law in order to stop the use of noncompete clauses

Maravail LifeSciences, a supporter of this bill, explains that their “industry is heavily reliant on attracting top talent from across the country and around the world to continue driving innovation and economic growth. However, the use of noncompete clauses in employment contracts can hinder this process, preventing companies from recruiting the best candidates and limiting employee mobility. This is especially problematic in the biopharmaceutical industry, where the need for highly skilled workers with specialized knowledge is particularly acute.” As Maravail further explains, the “use of noncompete clauses in employment contracts, can have a chilling effect on employee mobility and stifle economic development. Research has shown that noncompete clauses limit firms’ ability to hire and depress innovation, growth, and are associated with suppressed wages and exacerbated racial and gender pay gaps.”

This bill 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. Additionally, the bill prohibits an employer or former employer from attempting to enforce a contract that is void under California’s restraint of trade law regardless of whether the contract was signed and the employment was maintained outside of California. Further, the bill 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. The bill also provides that an employer that 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 bill provides robust enforcement mechanisms for the enforcement of these provisions. Specifically, the bill provides that the Attorney General may bring an enforcement action. Additionally, 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.

Proponents believe that these enforcement mechanisms and enhancements to the restraint of trade law will deter employers from pushing noncompete clauses into employment contracts and from threatening employees with lawsuits over contract provisions that are void.

SUPPORT

California Employment Lawyers Association

Maravai LifeSciences

46 Law School Professors

OPPOSITION

None known

RELATED LEGISLATION

Pending Legislation:

AB 747 (McCarty, 2023) provides, among other things, that an employer shall not enter into, present an employee or prospective employee as a term of employment, or attempt to enforce any contract in restraint of trade that is void under the chapter regarding contracts in restrain to trade, which is Sections 16600 through 16607 of the Business and Professions Code. AB 1076 is in the Assembly Judiciary Committee.

AB 1076 (Bauer-Kahan, 2023) codifies the case of Edwards v. Arthur Andersen LLP (2008) 44 Cal.4^th 937, which provides that noncompete agreements in an employment context and noncompete clauses within employment contracts are void, even if the agreements are narrowly tailored, unless an exception applies. AB 1076 is in the Assembly Labor and Employment Committee.

Prior Legislation: None known.

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1. Edwards II, v. Arthur Andersen LLP (2008), 44 Cal. 4^th 937, 945-46. ↑