Recent Amendments to California Business and Professions Code Section 16600: Sharper Teeth for a Potent Statute and a Serious Trap for Unwary Employers

On January 1st, California ushered in a new era of employee freedom by enacting two new bills amending California’s Business and Professions Code §16600 - SB 699 and AB 1076. Both laws, which took effect January 1, 2024, significantly reformed California’s public policy and long standing, anti-noncompete law, considered to be one of the broadest, right to compete statutes in the country. At the heart of this transformation lies the novel California Business and Professions Code Section 16600 (“BPC §16600”), originally adopted in 1872 as Civil Code Section 1673.

The changes fortify and add serious teeth to California’s well-established public policy fostering the right to compete by employees and independent contractors. The legislature imposed an affirmative notice requirement on all companies to notify current, and many former employees/independent contractors that those agreements they signed, which contain prohibited, anti-compete provisions, are void and unenforceable. The new amendments impose financial burdens, including legal fees, civil penalties, and other consequences, on companies that do not follow the new directives, which must be followed, and notices given to current and many former employees/independent contractors by February 14, 2024.

This article discusses the history of BPC §16600 and the two new legislative enactments that add considerable teeth with the two new sections of the existing law, BPC §§16600.1 and 16600.5. We explore below the intricacies of these new amendments, their key elements, target audiences, and their impact on existing anti-competitive regulations in California. We also provide a “call to action” by companies that require their current or former employees/independent contractors to sign agreements containing offending, anti-compete provisions.

BPC § 16600 - Prior Law

BPC §16600 has acted as a powerful champion of free competition for California-based employees and independent contractors, with a simple yet potent declaration. BPC §16600 is stark, definitive, and simple. The statute states: "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." That is the entire statute that has existed in California since 1872 and has been at the forefront of California’s pro-competition legislation, which diverges from, and contrasts with the laws of almost every other state.

Historical Backdrop

Before the enactment of BPC §16600 in 1941, California embraced the common law doctrine of reasonableness, which allowed courts to uphold, or void, certain noncompete agreements depending on the specific circumstances of each case. During the early to mid-20th Century, as California’s population and industry exploded, growing concerns about stifling competition and worker mobility within the state prompted calls for reform. To address those concerns, California implemented BPC §16600, adopting a stricter, black-and-white stance against contractual restraints on freedom of competition within professions and businesses.

Intended Scope and Application

The broad language of BPC §16600 encompasses a wide range of individuals and entities. Employees, freelancers, independent contractors, and even business owners fall under its protection. The law applies to any attempt to restrict someone's ability to engage in their chosen lawful profession, trade, or business, regardless of the industry or specific job function. It applies uniformly to lawyers, accountants, and other professionals, to rank and file employees, independent contractors, commissioned salespersons, restaurant workers, just about anyone.

The only three (3), narrow exceptions contained within BPC §16600 underscore the reach of the statute. BPC §16600 includes restrictive covenants in the sale or dissolution of corporations, partnerships, and limited liability corporations. (See Cal. Bus. & Prof. Code §§ 16601, 16602, and 16602.5). Otherwise, every other agreement that “restrains one from engaging in a lawful profession, trade, or business of any kind” is void. Period. About as broadly worded, and simply stated as a statute can be.

Judicial Interpretation

California courts have consistently interpreted BPC §16600 broadly, favoring free competition and individual opportunity. This strong stance is evident in several landmark cases:

Edwards v. Hollywood Fanfare Corp. (1979): The court invalidated a covenant not to compete in an employment contract, highlighting the public policy favoring employee mobility and freedom to pursue one's chosen profession.

Electrocomponents, Inc. v. MPR Electronics, Inc. (1981): The court extended the protections of Section 16600 to non-employee situations, voiding a noncompete clause in a distributor agreement based on its potential to impede competition.

California Pizza Kitchen, Inc. v. Mangual (2000): The court reaffirmed the broad application of Section 16600, striking down a noncompete clause in a franchise agreement due to its potential to limit economic opportunities within the pizza industry.

These cases, and many others, exemplify California’s public policy, and its courts’ dedication to upholding the letter and spirit of BPC §16600, to ensure individuals and businesses within California can operate freely and contribute to a dynamic and competitive marketplace.

Beyond the Courts

The effect of BPC §16600 extends beyond legal precedents. It empowers individuals to negotiate contracts with greater confidence, knowing that unreasonable restrictions on their livelihoods are likely to be invalidated if contested. This public policy of open competition has helped foster a climate of trust and fair competition within the California business landscape and earned California a reputation as a serious “right to work” state.

California BPC §16600 stands as a testament to California’s commitment to promoting free competition and protecting individual economic opportunity. Its broad scope, coupled with consistent judicial interpretation, has created a vibrant business environment where individuals can pursue their chosen paths without undue restraints found in many other, “pro-employer” states.

The recent amendments to the law, discussed below, will only strengthen the rights of individuals freedom to compete with their former firms free of the threat of ruinous and expensive litigation under illegal, void, and unenforceable noncompete agreements. These recent amendments to the law add considerable teeth to what has been California’s efforts to safeguard worker rights, free competition, and a healthy and dynamic economy.

Amendment One: SB 699 and New BPC §16600.5

Senate Bill SB 699, signed into law September 1, 2023, and effective January 1, 2024, added Section 16600.5 to the Business & Professions Code. This amendment expands California’s existing restrictions on noncompetes to cover agreements signed out of state, with non-California companies, and creates new enforcement rights for employees to challenge noncompete clauses otherwise void under BPC §16600.

BPC §16600.5 contains two main tenets.

First, it creates an extraterritorial reach by asserting California's legal authority over noncompete agreements signed out of state, with out of state companies, declaring any such agreement between an employee or prospective employee and an employer – no matter where and when the contract was signed – to be unenforceable within California.

This provision departs from the previous territorial limitations of Section 16600, which mainly addressed noncompete clauses within intrastate contracts. Thus, the law has been expanded to cover out of state individuals who contract with out of state companies whose home laws permit anti compete provisions, if the affected worker moves to, or subsequently resides in California.

Second, new BPC §16600.5 creates new, strong enforcement mechanisms by:

(i) Prohibiting employers from even entering into contracts containing provisions declared void under BPC §16600; and

(ii) Defining any attempt to enforce such agreements as a "civil violation," potentially subjecting employers to monetary penalties, injunctive relief, legal fees, and other sanctions.

BPC §16600.5 took effect January 1, 2024, immediately impacting all existing and future noncompete agreements within its scope. This means any such noncompete currently in place with any existing or future California based employees, regardless of its origin, is now unenforceable within California.

The target audience for BPC §16600.5 is expansive and encompassing. It applies to:

(i) Workers of all levels and roles; from executives and professionals to hourly workers and independent contractors.

(ii) Prospective employees, offering protection even before an employment relationship officially begins; and

(iii) Noncompete agreements in diverse contexts, covering employment contracts, severance agreements, and contracts with independent contractors.

Changes to Existing Law

BPC §16600.5 significantly alters the preexisting legal landscape established by BPC §16600. Here's a breakdown of the key changes:

Extraterritorial reach: Prior limitations based on the location of contract formation are eliminated, extending protection to California employees no matter where the noncompete agreement originated or was signed. For example, if a Missouri based employee contracted with a Missouri based company, and then relocates to California to work for the same company, BPC §16600.5 applies to whatever noncompete agreement was signed in Missouri. The key focus is on where the affected worker works and resides.

Remote Work: Employees or independent contractors working remotely from other states for California-based employers are still protected by BPC §16600.5, as long as their work, or their employer, has a connection to California.

Stricter enforcement: The creation of a "civil violation" category encourages stronger legal action against companies trying to enforce invalid noncompete clauses. Before the adoption of BPC §16600.5, if an employer violated the law and forced an employee to sign a prohibited, void, noncompete agreement, the only consequence was a judicial determination that the agreement was void and unenforceable. Now, however, a company that requires a worker (employee or independent contractor) to sign a violative noncompete agreement is liable for a civil violation. Companies no longer can use the threat of expensive, time-consuming litigation with no financial consequence to “tow-the-line” and respect an otherwise void, unenforceable noncompete agreement.

Proactive protection: The new amendments prohibit employers from even entering into such agreements which bolsters worker freedom and discourages the use, or threat of enforcement of unenforceable noncompete clauses altogether.

The ramifications of BPC §16600.5 are far-reaching. These are some potential consequences:

Increased employee mobility: California workers will enjoy greater freedom to pursue new opportunities without noncompete restrictions, and the threat of baseless litigation hindering their choices.

Enhanced competition: With talent flows unhindered, businesses may face increased competition for skilled workers, potentially leading to improved wages and benefits.

Shifting employer practices: Companies operating in California or having employees or independent contractors living or working in California will need to adapt their hiring and contract practices to comply with the stricter regulations.

The potential consequences for employers violating BPC §16600.5. include: 

1. Unenforceability of Noncompete Agreements:

Any contract containing a noncompete provision that restricts a California based worker's ability to engage in a lawful profession, trade, or business is considered void and unenforceable in California. This applies no matter where or when the contract was signed.

2. Civil Violation:

Employers who enter into or try to enforce such void contracts will now be deemed to be committing a civil violation under BPC §16600.5. This designation carries several potential consequences:

• Monetary Damages: Employees or prospective employees can seek financial compensation for any losses incurred due to the employer's attempt to enforce the noncompete clause. This includes lost wages, benefits, business opportunities, and even emotional distress damages.
• Injunctive Relief: Courts can issue injunctions prohibiting employers from continuing to enforce or threatening to enforce the noncompete agreement. This protects employees' rights to freely pursue their chosen careers.
• Attorney's Fees: If the worker prevails in a lawsuit against the employer, the court can order the employer to reimburse the employee's attorney's fees and litigation costs. Now, employers face the cost of not only their own legal fees, but payment of the successful worker’s litigation fees and costs as well.

3. Reputational Damage: Beyond legal sanctions, employers who violate BPC §16600.5 risk tarnishing their reputation as a fair and ethical employer. This can undercut their ability to attract and retain top talent in a competitive labor market.

4. Regulatory Scrutiny: The California Attorney General's Office and workforce development agencies may investigate and initiate enforcement actions against employers who repeatedly or egregiously violate BPC §16600.5.

5. Potential for Class Actions: If an employer's actions affect a large group of employees, they may face class-action lawsuits, potentially resulting in substantial financial penalties, widespread injunctions, and substantial legal fees and litigation costs for both sides- the employer’s and the class of affected workers. These potential costs can be financially ruinous to many companies.

Amendment Two: AB 1076 and New BPC §16600.1

Aside from SB 699, California adopted a companion bill, Assembly Bill AB 1076, signed into law October 13, 2023, also effective as of January 1, 2024.

AB 1076 does several things. First, it amends BPC §16600 by codifying existing case law, decided previously under BPC §16600, including a seminal case decided by the Supreme Court of California, Edwards v. Arthur Andersen, LLP, 44 Cal. 4^th 937 (2008). Edwards held that even narrowly drafted noncompete agreements are prohibited in California, unless they fall within the scope of one of the three exceptions to 16600.[1] Even more importantly, however, AB 1076 makes it “unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement that does not satisfy an exemption” [the same 3 exemptions described above].

AB 1076 also imposes a mandatory legal obligation on companies that they must provide individualized notices to all current employees and former employees (employed after January 1, 2022) that any noncompete agreements they signed are void. This individualized notice must be given by February 14, 2024, and a violation of this new section, 16600.1, “constitutes unfair competition under BPC 17200 et seq”. We cannot emphasize how important it is for all companies to have experienced counsel review their existing agreements and help draft the appropriate, individualized notice, to each affected worker.

Penalties for Violating BPC §16600.1

Under prior law, the consequence of having an employee sign what ultimately is determined to be a void noncompete agreement was a judicial determination that the offending provision is void and unenforceable. Since there were no real financial or other consequences of litigating the issue with workers who may have had a limited financial ability to mount a legal battle, AB 1076 goes further by making noncompete agreements unlawful, and includes in the law financial consequences for so companies that require workers to sign a void, unenforceable noncompete agreement.

Now, an employer commits an act of unfair competition under BPC §17200 by including a noncompete agreement or requiring an employee to sign such an agreement. And employers who fail to provide individualized notice to affected current and former employees by February 14, 2024 (Happy Valentines Day employers!) may face a civil penalty of $2,500 per violation, and a similar sized civil penalty for insisting an employee sign a void noncompete agreement, along with attorney’s fees and costs to the prevailing worker.

Where Can Void Noncompete Agreements Be Litigated?

A series of recent decisions by several Los Angeles state courts, makes it clear that legal actions by workers seeking to void unenforceable noncompete agreements under BPC §16600, may be brought by the worker in California, regardless of a foreign choice of law or venue provision to the contrary.

Both cases arose out of disputes between a Missouri insurance brokerage firm, Lockton Companies, and California based former executives and partners who challenged the enforceability of Lockton’s noncompete agreements. Lockton, in turn, argued unsuccessfully that the cases should be heard in Missouri, relying on the state law and forum venue specified in those alleged unenforceable noncompete agreements. The two courts who have considered the issue rejected Lockton’s arguments for two reasons.

First, the courts found the burden is on the employer, who insisted its workers sign what are alleged to be void and unenforceable noncompete agreements, to establish “Missouri law provides the same or greater rights than California law”. Both courts rejected that argument since Missouri law, unlike California law, permits noncompete agreements and is much more permissive than California and BPC §16600.

While these are the first of what are expected to be a deluge of similar cases, employers, and affected workers, should be aware California is likely to entertain jurisdiction of these kinds of cases under BPC §16600, despite (i) foreign choice of law clauses; and (ii) a foreign forum designation clause in the offending agreement. California courts have a long-standing policy of taking jurisdiction over disputes that involve public policy statutes, such as BPC §16600.

Summary and Our Suggestion to California Based Employers

Our firm’s practice includes a significant focus in the financial services and securities industry, where restrictive covenants and noncompete agreements are commonplace and proliferate. We have had many cases involving firms who insisted registered representatives, investment advisors, and others sign what were unenforceable and void agreements that violated BPC §16600. Many firms did so on the belief the in terrorem effect of an otherwise void noncompete agreement would “keep the worker in line” and prevent the affected worker from leaving and competing with the former firm.

While we have successfully challenged those unenforceable agreements and ultimately set them aside, the consequences to employers who foisted those agreements on their existing and prospective employees or independent contractors were fairly minimal. The cost to the employee or independent contractor of waging a court or arbitration battle to set aside the offending agreement was significant and the only real outcome was a judicial determination the agreement was, in fact and law, void and unenforceable. There were, however, no real consequences to the employer, many of whom used these void agreements as “sticks” to keep their employees from jumping ship.

The new changes, including new sections 16600.1, and 16600.5, however, add the missing teeth to one of California’s most pro-employees, long-term statutes. This levels the playing field between employees and employers, bringing measurable financial, and other consequences to the table.

We encourage all California based firms to have experienced, competent counsel review all of their agreements with (i) all current workers; and (ii) all prior workers hired, or otherwise engaged, after January 1, 2022, to determine which worker signed an offending noncompete agreement. We will then be able to draft- as required by the new amendments- an individualized notice to all affected workers advising them the offending agreements are void and unenforceable.

REMEMBER: THE LAW REQUIRES THESE INDIVIDUALIZED NOTICES TO SENT OUT NO LATER THAN FEBRUARY 14, 2024. TIMING IS SHORT AND THE CONSEQUENCES OF NON-COMPLIANCE DIRE.

We can be reached at (619) 696-9500.
Ask for the partner who regularly handles your matters, or our Managing Partner, Erwin Shustak.
He also can be reached at [email protected]

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