California Targets Out-of-State Non-Competes: Risk of Lawsuits for Employers

The new law, SB 699, will take effect on January 1, 2024. As stated in the law's preamble, its aim is to target out-of-state non-compete provisions.

California has long rendered non-compete agreements void. However, this law aims to prohibit the use of such agreements and provides a right of action for aggrieved workers. In effect, this law:

• Invalidates non-compete agreements signed outside of California if the employee obtains competitive work in California.

For example, an employee subject to a non-compete agreement in Texas now has cover to seek competitive employment in California.

• Prohibits California employers from entering into non-compete agreements with their out-of-state workforce.

For example, a California employer who enters into a non-compete agreement with a remote worker located in Florida could be covered by the new law.

• Imposes undefined civil penalties on offending companies, and allows affected employees to sue to block enforcement of a non-compete or for damages (and, if successful, recover attorney's fees).

For example, a Texas based worker signs a non-compete with their Texas-based employer, but then moves to California for a new job at a competitor. The worker could bring a claim in California to void that non-compete agreement, and recover attorney's fees if successful.

The cross-border nature of this new law raises constitutional questions that will need to be resolved.

Existing exceptions to California's non-compete prohibition - e.g., in a sale of a business or to protect trade secrets - remain in effect under the new law.