Huge Liability Lurking In Your Contracts: The California Business and Professions Code

California has traditionally barred the use of non-competition and, to some extent, non-solicitation clauses post-termination of employment. Recent developments in the state have strengthened this prohibition through the enactment of two new laws. This affects the California Business and Professions Code.

The amendments apply to Section 16600 and introduce Sections 16600.1 and 16600.5. They render non-competition agreements following employment termination null and unenforceable. This blog aims to break down the intricate details of these changes. It is also meant to shed light on the rights and responsibilities bestowed upon both employers and employees.

Under the new laws:

1. Emphasize that any contract deemed void under Section 16600 of the California Business and Professions Code is unenforceable. This is irrespective of its signing location or date, and it also prohibits employers from enforcing such contracts. Affected individuals are granted the right to pursue legal action for damages and attorney fees.
2. Mandate that any employer who has engaged in a non-compete agreement with a current or former employee hired after January 1, 2022 – an agreement contravening California’s prohibition on post-employment restrictive covenants – must inform the respective employee of the agreement’s void status by February 14, 2024.

Section 16600.5 of the California Business and Professions Code received the following additions:

1. Non-compete agreements deemed invalid under Section 16600 of the California Business Professions Code are unenforceable. This is regardless of the location or time of their signing.
2. Employers are prohibited from enforcing non-compete agreements that are considered invalid. This applies even if the agreement was executed and the employment maintained outside the state of California.
3. Employers are restricted from including invalid non-compete provisions in contracts with current or potential employees.
4. Any employer attempting to enforce an invalid non-compete agreement is subject to civil penalties.
5. Current, former, or potential employees possess the right to initiate private legal action to uphold this law, seeking injunctive relief and/or recovering actual damages. In the event of success, they are entitled to reasonable attorney’s fees and costs.

The following provisions have been introduced to Section 16600.1 of the California Business and Professions Code:

1. If an employer has entered into a non-compete agreement with a current employee or former employee hired after January 1, 2022, and the agreement does not fall within statutory exceptions, the employer is obligated to inform the employee that the non-compete provision is void no later than February 14, 2024.
2. This notification must be conveyed through a written, personalized communication to the employee or former employee, dispatched to their last known physical and email addresses.
3. Failure to provide such notification is deemed unfair competition under Chapter 5 (Section 17200 of the California Business and Professions Code).

Exceptions to the non-compete prohibition include the following conditions:

• A person sells the goodwill of a business, or an owner of a business entity sells or disposes of all of their ownership interest in the entity, or an owner of a business entity sells:
• All or substantially all of the operating assets along with the goodwill of the business entity.
• All or substantially all of the operating assets of a division or subsidiary, along with the goodwill of that division or subsidiary.
• All of the ownership interest of any subsidiary.
• The seller agrees with the buyer to refrain from conducting a similar business within a specified geographic area where the sold business, or that of the business entity, division, or subsidiary, has been conducted.
• The buyer, or any person inheriting the goodwill or ownership interest from the buyer, engages in a similar business within that specified geographic area. (Refer to California Business & Professions Code Section 16601.)

Furthermore, the following circumstances allow non-compete agreements by statute in:

• Any partner may, upon or in anticipation of the dissolution of a partnership or from a partnership, agree that he or she will not carry on a similar business within a specified geographic area where the partnership business has been transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from any such other member of the partnership, carries on a like business therein. See California Business & Professions Code Section 16602.
• A member may, upon or in anticipation of a dissolution of, or the termination of his or her interest in, a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction recognizing such a series), agree that he or she or it will not carry on a similar business within a specified geographic area where the limited liability company business has been transacted, so long as any other member of the limited liability company, or any person deriving title to the business or its goodwill from any such other member of the limited liability company, carries on a like business therein. See California Business & Professions Code Section 16602.5.

Conclusion

Understanding the complex landscape of non-compete agreements in California is crucial for both employers and employees. The intricacies of Sections 16600, 16600.1, and 16600.5 of the California Business and Professions Code require extensive legal knowledge. Compliance is essential to avoid legal pitfalls.

Carbon Law Group, with its expertise in California employment law, stands as a reliable partner for businesses and individuals alike. Our legal professionals ensure that your non-compete agreements align with the law’s requirements. Whether you’re an employer seeking guidance or an employee navigating the implications of an agreement, we’re here to provide solutions.

Don’t risk the consequences of non-compliance. Trust Carbon Law Group to safeguard your interests and ensure legal clarity in matters of employment agreements. Contact us today for expert assistance in understanding, implementing, and navigating the intricate landscape of California’s non-compete regulations.