by Eric D. Morton
“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.” California Business and Professions Code Section 16600.
Few people know that the above statute is the reason that California is technology industry powerhouse. This law has been broadly and strictly enforced, and California is about to strengthen it.
The Foundation of Silicon Valley
California’s law prohibiting noncompete contracts/clauses was enacted in 1872. The law has had huge economic impact, particularly in the San Francisco Bay Area. In the late 1950s, engineers working for early computer companies realized that they could quit their jobs and start their own businesses. This started a rapid increase in technology companies in the Bay Area that accelerated as computers, and their software, became more important in 1980s and later. Almost every important tech company in the past 40 years was founded by another company’s former employee. B. & P. Section 16600 is literally the foundation of Silicon Valley.
Strongly Enforced – Contract is Void
California’s courts have strongly enforced this law. Any contract or clause in a contract that inhibits an individual from working for themselves or someone else is void. This means that an entire contract can be found to be not just unenforceable but void. This can have severe consequences in the event of litigation between an former employer and former employee. I represented a business owner who was sued by her former employer. The former employer sued my client for breach of a “Confidentiality Agreement”, among other things. This agreement forbade the employee for using anything learned on the job after leaving employment. The judge agreed with us that the agreement restrained my client from working in her field and that the agreement was void. That ruling effectively gutted the lawsuit against our client which we eventually settled on favorable terms.
California Expands Law
Governor Newsom signed SB 699 this month that extends California restrictions on non-competes. The new law will be Business and Professions Code Section 16600.5 and provides:
(a) Any contract that is void under Business and Professions Code section 16600 is unenforceable regardless of where and when the contract was signed, and cannot be enforced.
(b) An employer cannot enter into a contract with a prospective or current employee that includes a void provision under this chapter.
(c) An employer that enters into, or attempts to enforce a void contract commits a civil violation, and may be subject to a private action for injunctive relief or monetary damages. An employee bringing such an action may also recover reasonable attorneys’ fees and costs.
16600.5 will have wide ranging effects. The paragraph (a) means that California courts will not enforce a non-compete contract even if it was entered into outside California by parties not based in California. If an out of state employee comes to California and accepts employment here in violation of a non-compete contract that would be void in California, then California courts will not enforce that contract – even if it was legal in the other state. There are a number of constitutional issues raised by this provision, so we’ll see if the courts uphold it.
Paragraphs (b) and (c) discourage the practice of having employees sign void non-compete agreements. Employers have done so, even though the contracts are void, in order to intimidate employees. These two paragraphs affirmatively prohibit employers from entering into such contracts and give employees the right to sue employers who enter into such contracts. Section 16600.5 will take effect January 1, 2024.
Takeaways
Employers must carefully review their contracts with their employees. Any terms that might be considered a restraint of the employee’s ability to seek other employment or open a new business could make the entire agreement void. And, as of January 1, 2024, that void agreement could be the basis for the employee to sue the employer. This is especially true for confidentiality and trade secret agreements that are often vague and over-broad. Employers may wish to seek the counsel of an attorney to review their agreements.
Eric D. Morton is the principal attorney at Clear Sky Law Group, P.C. He can be reached at 760-722-6582, 510-556-0367, or emorton@clearskylaw.com