In our previous post on October 23 2023, we discussed A.B. 1076, which makes important changes to California Business & Professions Code Section 16600. That section currently makes void, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” subject to certain exceptions.
Pursuant to A.B. 1076, effective January 1, 2024, Section 16600 will be “read broadly, in accordance with Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored.” A few exceptions will still apply, such as restrictive covenants applicable to the sale or dissolution of certain entities.
What is A.B. 1076’s effect on nonsolicitation, as opposed to noncompete, agreements? Great question. Here’s our take.
In Edwards, the California Supreme Court ruled that a noncompete provision was void where the employee agreed not to perform professional services for clients with whom he worked at Arthur Anderson (his former employer), and not to solicit Arthur Anderson’s clients. The Court’s rationale focused on Section 16600’s “plain meaning” that employers generally may not restrain former employees from engaging in their profession, business, or trade. By prohibiting Edwards from soliciting Arthur Anderson’s clients, the nonsolicitation clause effectively was an unlawful noncompete and therefore violated Section 16600. (Notably, the Court did not address “anti-raiding” clauses prohibiting the solicitation of employees, the validity of which is still an open question in California.)
A.B. 1076 does not specifically state that it applies to nonsolicitation provisions. However, based on the Court’s holding in Edwards, that likely is the case. If so, then the requirements of a related new law, S.B. 699, also may apply. S.B. 699 prohibits employers from requiring employees to execute unlawful noncompete agreements as a deterrent to engaging in the conduct prohibited by the agreement. In other words, until S.B. 699 is effective, an employer may recognize that a noncompete is unenforceable but include it in employee agreement anyway in the hope that the employee will behave as if the provision is enforceable. As of January 1, though, that approach will be much riskier.
A.B. 1076 also requires employers to notify employees and former employees that any unlawful noncompete clauses to which they previously agreed are void. That provision, too, likely applies to clauses prohibiting the solicitation of clients. We recommend working with legal counsel to determine if A.B. 1076 applies to your nonsolicitation provisions.
Obviously, employers should be cautious about requiring employees to agree to a noncompete or nonsolicitation agreement. Obtaining proper legal advice is critical to avoid potential liability.