Complying with the Notice Requirement of Cal. Bus. & Prof. Code § 16600.1

01.26.2024

This is the second article in our series discussing California’s recent amendments to Business and Professions Code section 16600 which deals with covenants that restrict employee mobility such as noncompete and nonsolicitation clauses. The first article can be found here.

Newly enacted Section 16600.1 of the California Business and Professions Code requires employers to send a notice to any current employees or former employees (who were employed after January 1, 2022) “whose contracts include a noncompete clause, or who were required to enter a noncompete agreement, that does not satisfy an exception to this chapter.” Specifically, employers must send an “individualized communication” to affected employees that identifies the void covenant by February 14, 2024.

Because employers must comply with these provisions before courts will have interpreted what the Legislature meant by “noncompete agreement,” there is some uncertainty as to what types of restrictive covenants trigger the notice requirement. Moreover, neither the Legislature nor California courts have provided clear guidance whether certain types of covenants are void under Section 16600, let alone whether the Legislature’s use of the word “noncompete” was intended to implicate all restrictive covenants rendered void by Section 16600. This puts employers in the untenable position of having to choose between potential risk of liability for failure to notify former employees that they are relieved of certain void covenants in their employment agreement, and unnecessarily inviting litigation by notifying current and former employees that their employment agreements contain a covenant that may or may not be unlawful under Section 16600. Ultimately, without more precise guidance from the Legislature, an employer’s risk tolerance may dictate the types of restrictive covenants for which it sends notice under Section 16600.1.

There is little question that a blanket and naked covenant not to compete triggers the notice provision in Section 16600.1. There is an argument that explicit noncompete covenants like these are the only type of covenant that requires individualized notice to employees. In support of this strict interpretation, employers may argue that the Legislature intentionally chose to use the phrase “noncompete agreement,” rather than “any provision void under this chapter”—which is used in other parts of Section 16600—to signal that the Legislature intended to implicate only explicit noncompete covenants that are not tied to one of the limited statutory exceptions.

A closer examination of California case law, however, reveals that this aggressive approach may not be prudent. Although Section 16600.1 uses the word “noncompete,” California courts have held that a variety of restrictive covenants are the functional equivalent of or constitute “de facto” noncompetes. Consequently, the notice provision likely applies to more than just an express and naked covenant not to compete.

There are four types of restrictive covenants that may implicate Section 16600.1. We have included below a brief description of each type of restrictive covenant, related case law, and a Section 16600.1 risk assessment. It is important to note that these are broad categories of restrictive covenants. It is possible that the specific language in your restrictive covenant renders it more or less likely to trigger notice obligations under Section 16600.1. It is therefore always best to have a qualified attorney review your restrictive covenants before making a decision. The following four broad categories of restrictive covenants are listed in descending order of likelihood of triggering the Section 16600.1 notice requirements:

Explicit Noncompete. As described above, explicit covenants not to compete that are not tied to a recognized exception trigger the Section 16600.1 notice requirement.
Customer Nonsolicitation. Customer nonsolicitation covenants prevent an employee from soliciting their employer’s customers for a specified period of time following termination of the employment relationship. Because this type of restrictive covenant most closely resembles a blanket non-compete covenant, it very likely triggers the Section 16600.1 notice requirement. Indeed, California courts have held that customer nonsolicitation covenants are functionally equivalent to explicit noncompetes. In fact, on the same day the California Legislature enacted Section 16600.1, it amended Section 16600 to state that “[t]his section [including Section 16600.1] shall 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.” Notably, however, the court in Edwards v. Arthur Andersen found that a customer nonsolicitation covenant was void. Both the Supreme Court and the California Legislature referred to this covenant as a “noncompete.” This strongly suggests that the term “noncompete,” as used in Section 16600.1, should be understood “broadly” to include customer nonsolicitation covenants. As the Supreme Court in Edwards made clear, California has a strong public policy in favor of employee mobility and, therefore, against restrictive covenants that tend to impede or restrain employee mobility. In this context, courts in California law are unlikely to accept such a narrow construction of “noncompete” that excludes customer nonsolicitation.
Overbroad Confidentiality Covenant. Confidentiality covenants are often overbroad in two ways. First, they unlawfully attempt to restrict employees’ use of non-trade secret information post-employment; and second, they restrict former employees from using non-trade secret confidential information to compete with the employer or solicit its customers, vendors, and employees. The California Court of Appeals and California District Courts have held that such covenants are “de facto” noncompetes that violate Section 16600 by restraining employees from practicing their chosen profession. It is therefore conceivable that overbroad confidentiality covenants—i.e., post-employment nondisclosure obligations that are not appropriately limited to protect the employer’s trade secrets and other intellectual property rights—may trigger Section 16600.1’s notice requirement. Whether a confidentiality covenant is overbroad is a highly particularized inquiry that will depend on the specific language in your confidentiality and nondisclosure agreement, and the context of your business, intellectual property, and post-employment restrictions. Consequently, confidentiality covenants in particular require a keen eye to discern whether sending Section 16600.1 notices may be advisable.
Employee Nonsolicitation. Employee nonsolicitation covenants restrict current and former employees from soliciting other employees to leave their current employer to join a competitor. While recent trends and caselaw in the past several years strongly suggest that California views these types of covenants as void under Section 16600, whether an employee nonsolicitation clause in an employment agreement triggers the notice requirement under Section 16600.1 is more of a grey area. Following the Supreme Court’s decision in Edwards, courts in California have been increasingly eager to strike down employee nonsolicitation covenants as void under Section 16600. Both the California Court of Appeals and Central District of California have done so. The law on employee nonsolicitation remains partially unsettled, however, because of a nearly 40-year-old California Court of Appeal decision that upheld employee nonsolicitation covenants to the extent they are used to “restrain[] former employee[s] from disrupting, damaging, impairing or interfering with [their] former employer's business by ‘raiding’ its employees.” Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985). But, as will be discussed in more detail in a subsequent article, more recent case law has turned against Loral and casts doubt on its continued viability in the years since the Supreme Court’s decision in Edwards. Accordingly, employers who have utilized employee nonsolicitation covenants should consider revising their agreements, assessing their risk tolerance, and discussing with counsel whether it makes sense to send Section 16600.1 notices.

If you have questions or are wondering whether the restrictive covenants in your employment agreements trigger the notice requirements in Section 16600.1, please contact the authors of this Alert or your usual AALRR attorney and trusted advisor. If you find yourself or your company in a dispute related to these new laws, our Intellectual Property Team is uniquely positioned to advocate on your behalf. California’s strong policies in favor of employee mobility have significantly diminished the recourse employers can obtain against former employees. Despite these changes, intellectual property remains a steadfast tool for keeping your company’s valuable assets and goodwill intact during times of high employee turnover. AALRR’s Intellectual Property Team consists of experts in trade secret, patent, copyright, trademark, and trade dress law supported by a robust employment law group that has served all types of companies and organizations in myriad industries in California for decades.