California has long been a trendsetter in employee rights, and its recent legislative actions such as A.B. 1076 and S.B 699 are no exception. Historically, the state has frowned upon non-solicitation agreements, viewing them as impediments to employment mobility and competition. California legislators have made clear that they no longer tolerate inclusion of non-solicitation provision in employment contracts as they are deemed to have a chilling effect on competition and trade. The recent legislative changes have fortified this stance and will have significant impact on employment contracts.
Under the Business and Professions Code § 16600, California has traditionally invalidated contractual provisions that unfairly restrict a person’s ability to engage in their profession, trade, or business. This was firmly established in Edwards v. Arthur Andersen LLP, where the California Supreme Court interpreted § 16600’s prohibition on non-compete clauses based on its “plain meaning.” The case established that non-compete provisions would be void if they restrained former employees from engaging in their profession, trade, or business.
In the wake of Edwards, non-solicitation agreements also fell under scrutiny. The courts also viewed them as unreasonably interfering with an employee’s ability to compete post-employment. Courts then steadily applied the Edwards rationale, leading to several cases where non-solicitation agreements were invalidated under section 16600.
In 2023, California legislator launched an attack on non-solicitation clauses. California passed A.B. 1076 to align the scope of § 16600 with Edwards and courts’ interpretation of the statute. This legislative action codified the notion that contractual clauses restricting an individual’s professional freedom are inherently void. Although A.B. 1076 does not explicitly address non-solicitation provisions, the legal trajectory suggests their inclusion.
S.B. 699, another crucial piece of legislation, that enacts Business and Professions Code Section 16600.5. This new provision renders contracts with restrictive covenants void, regardless of the geographical or temporal context of the contract. Yet, perhaps the most significant change brought about by SB 699 is the exposure of employers to damages and attorney fees. Before this, employees challenging the non-solicitation provisions of their employment contract in California could not claim damage awards or attorney’s fees. Their remedies were limited to restitution and injunctive relief. Now, with the enactment of Section 16600.5, employees can sue for actual damages and are entitled to recover attorney’s fees and costs. This dramatically increases the potential costs for employers and is expected to deter the inclusion of non-solicitation provisions in their employment contracts. For instance, a California-based employer who incorporates a non-solicitation clause in a contract with a non-Californian employee could face substantial damages, even if the clause is never enforced. The introduction of these new remedies clearly demonstrates a legislative intent aimed at deterring the inclusion of such restrictive covenants in employment contracts from the outset which the courts are likely to enforce.
California employers must now tread carefully. The inclusion of non-compete or non-solicitation clauses in contracts with employees could result in significant legal and financial repercussions. Consequently, this change is expected to drive a thorough reevaluation of current employment contracts and practices. Furthermore, it sets a precedent with the potential to influence employment law throughout the United States.
