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Introduction
Emerging companies face many challenges, but the enactment of two new competition laws earlier this year makes it easier for California startups to acquire talent.
While California non-compete clauses were already largely unenforceable under section 16600 of the California Business and Professions Code, the new laws were passed under Senate Bill 699 and Assembly Bill 1076. Both enhance the employee protections of the Code by more broadly construing a statutory provision that prohibits non-compete clauses in workplace contracts. Non-compete clauses are contractual agreements that prohibit a departing employee from working for a competitor or opening a competing business. They are widely criticized for stifling innovation, limiting talent mobility, reducing competitive advantage, and suppressing entrepreneurial spirit.
For emerging Bay Area firms, the heightened legal protection of the new laws offers several competitive advantages. First, emerging companies are better able to attract top talent when employees are not restricted from jobs in the same market. This fluidity of talent can enhance the exchange of ideas and help expand growing markets. Second, this exchange of ideas helps to cross-pollinate companies with experience and collaboration. And third, employees who gain experience in such an interconnected tech ecosystem are better poised to start their own ventures or join early-stage companies without facing legal barriers to entering the market.
This high degree of talent mobility in the Bay Area is widely credited with fueling the region’s entrepreneurial spirit.Â
Previous Regulation: §16600
The State Legislature adopted what would become section 16600 of the California Business and Profession Code in 1872 when it declined to take a reasonableness approach to non-competes, and, instead, generally barred them. There’s been little change in the law since. The current rendition of section 16600 illustrates that every contract restraining someone from engaging in a lawful profession, trade, or business of any kind is void.Â
Section 16600 calls for a broad reading of the statute in accordance with Edwards v. Arthur Andersen LLP. It clarifies that tailoring the language of any non-compete provision narrowly, where the employee is only partially restrained in their work, is not an exception to the general rule. In Edwards, an accountant working under a non-compete sued his former employer. The employer, Anderson, was selling off its tax business which Edwards worked under. Edwards was to begin working for the buyer but needed to be released from his non-compete agreement. Anderson offered Edwards a release as long as he waived his legal claims against Anderson. Edwards refused, was terminated, and the buyer withdrew its job offer. The defense argued Edwards wasn’t completely restrained from practicing as an accountant. Under the non-compete, Edwards was only barred from working for former clients for a period of 18 months after he left the company. Thus, the defense stated that he could find work elsewhere and the non-compete should be enforceable. The Supreme Court of California rejected this argument and refused to limit or restrain section 16600’s scope.Â
Senate Bill 699
Despite the section’s clear language, the Legislature found California employers continue to have employees sign non-compete clauses that are void and unenforceable. The Legislature notes the impact of recent empirical research that shows non-competes reduce entrepreneurship, job growth, firm entry, and innovation. In one study, the Government Office of Accountability found that increasing enforcement of non-compete agreements led to a 7 to 11 percent decline in job mobility for workers with a bachelor’s degree or higher. In another, it found wages to be generally lower when compared to jurisdictions with less enforcement. In other words, even when non-competes are void, just the threat of employers litigating against former employees slows worker mobility, depresses wages, and stifles innovation.
Senate Bill 699 (SB 699) was enacted to address these issues by providing employees a route to bring civil action against their former employers. The bill prohibits employers from entering into non-compete agreements except in a small number of circumstances. When a limited liability company dissolves, for example, parties can agree to non-competitive terms in narrow ways. Otherwise, when an employer enters into a void non-compete agreement with an employee, that employer is civilly liable and the employee can seek an injunction or recover damages. Prevailing employees are even entitled to attorney’s fees and costs against employers – removing threats of adverse litigation against employees on the move.Â
In what is likely to be a litigated issue, SB 699 also establishes that any non-compete can be unenforceable regardless of where the contract was signed. This extends the coverage of section 16600 to employment contracts that originate out of state. The result is workers under such contracts can use California law to void non-compete agreements in connection with previous employment from another state.Â
Assembly Bill 1076Â
In addition to formally voiding non-compete agreements, Assembly Bill 1076 will also require employers to notify current and former employees, employed by the employer after January 1, 2022, who signed an employee agreement containing a non-compete provision that any contractual non-compete clause is void under California law. Violations of Assembly Bill 1076 are subject to injunctions and fines of up to $2,500 per violation.
Even when they are unenforceable or void, signing non-compete provisions could have a chilling effect on employees reducing job mobility. This chilling effect may induce employees who would otherwise find another job to stay either because they are not aware that non-compete provisions are largely unenforceable in California or because they feel bound by their promise. Notifying employees that non-compete provisions they already signed may help to combat this effect.Â
Ultimately the notification requirement of Assembly Bill 1076 should lead to more mobility in the marketplace for employees leading to increased competition between employers and cross-pollination of ideas between companies.
Conclusion
California laws that effectively eliminate non-compete clauses encourage a dynamic and innovative entrepreneurial ecosystem that benefits emerging companies in the Bay Area. These laws are aimed at promoting talent mobility, entrepreneurial off-growth, and collaboration for years to come.
*The views expressed in this article do not represent the views of Santa Clara University.