We invite you to review our newly-posted November 2023 California Employment Law Notes, a comprehensive review of the latest and most significant developments in California employment law. The highlights include:
In Arias v. Superior Court, 46 Cal. 4th 969 (2009), the California Supreme Court ruled that Private Attorneys General Act (PAGA) actions need not satisfy class action requirements, and in the fourteen years since, PAGA plaintiffs have routinely (and often successfully) resisted attempts to apply class action principles to PAGA actions. A recent unpublished California Court of Appeal decision bucks that trend by lending support for an implied adequacy requirement for PAGA plaintiffs and counsel.
In Stone v. Kim, 2023 WL 8011417 (Cal. Ct. App. Nov. 20, 2023), the California Court of Appeal affirmed the dismissal of a PAGA claim brought by a plaintiff who sought to prosecute the action in pro per. As the Court explained, a PAGA plaintiff represents the interests of the state labor enforcement agency, so by proceeding in pro per, the plaintiff (who was not an attorney) was engaged in the unauthorized practice of law. Therefore, the trial court properly sustained the demurrer. Id. at *1
The Court could have stopped there. However, it continued by analogizing PAGA actions to qui tam actions brought under the False Claims Act (FCA)—a context it found “instructive.” Id. at *2. The Court cited U.S. ex rel. Rockefeller v. Westinghouse Electric Co., 274 F. Supp. 2d 10, 16 (D.D.C. 2003) for the point that, “[g]iven the potential” for the plaintiff to bind the government in such actions, “the government must have adequate representation,” and therefore, “qualified legal counsel.” Id.
The court in Rockefeller elaborated by analogizing FCA claims to class actions: “Like . . . a class member in a class action suit, a lay relator in a FCA action needs qualified legal counsel to ensure that the real party at interest, the United States, is adequately represented,” and “[t]he need for adequate legal representation on behalf of the United States is obviously essential.” Rockefeller, 274 F. Supp. 2d at 16. Stone found this reasoning also “applies to claims under [PAGA]”—and for good reason. Stone, 2023 WL 8011417, at *2. Like FCA relators, PAGA plaintiffs “represent and can bind the government, which needs adequate representation.” Id.
If PAGA implicitly requires that the government be represented by adequate counsel, it may stand to reason that it must also be represented by an adequate plaintiff. Just as the government may be prejudiced by inadequate legal counsel, it may also be prejudiced if its interests are represented by a conflicted plaintiff, or a plaintiff who is unaware of or unwilling to undertake her responsibilities as a party. Because a PAGA plaintiff acts in a law enforcement capacity on behalf of the State of California, other criteria—such as convictions for felonies or crimes of moral turpitude—arguably should also be disqualifying. See Cal. Gov. Code § 19572 (setting forth grounds for discipline of state civil service employees, up to and including termination).
While plaintiffs may object to any attempt to impose class action-type requirements in PAGA actions, by allowing a plaintiff to represent absent parties while aggregating together multiple alleged violations, PAGA raises similar challenges for the court system as class actions do. At times, these similar challenges may call for similar solutions, and if the recent oral argument in Estrada v. Royalty Carpet Mills, Inc. is any indication, courts may be open to some prudential limits on PAGA actions not expressly spelled out in the statute’s text. In this regard, requiring that the State of California be represented by adequate counsel and an adequate plaintiff could be low-hanging fruit.
On November 8, 2023, the California Supreme Court heard oral argument in Estrada v. Royalty Carpet Mills, Inc., a case that could have profound implications for the future of Private Attorneys General Act (PAGA) litigation. The Court granted review in order to decide whether courts have the power to strike or limit PAGA claims that would prove to be unmanageable at trial.
A prior case, Wesson v. Staples the Office Superstore, LLC, 68 Cal. App. 5th 746 (2021), held that trial courts have inherent authority to strike or limit PAGA claims that could not otherwise be made manageable. Just a few months later, the Court of Appeal in Estrada disagreed, concluding that while a court could limit the presentation of evidence to ensure a manageable trial (which could make it difficult for the plaintiff to prove widespread violations), courts had no authority to strike or limit PAGA claims before trial. Estrada v. Royalty Carpet Mills, Inc., 76 Cal. App. 5th 685 (2022).
When the California Supreme Court granted review in Estrada, court watchers would be forgiven for assuming that a total victory for the plaintiffs was a foregone conclusion. For over a decade, the Supreme Court cases that have largely defined PAGA jurisprudence—Adolph, Kim, Williams, Iskanian, and Arias—have almost uniformly been decided in the plaintiffs’ favor.
To be sure, the Court does appear poised to rule that trial courts lack the authority to strike PAGA claims based on manageability concerns. Multiple justices asked questions indicating skepticism about the purported source of this authority, and they suggested that less drastic measures could protect defendants’ due process rights and ensure the proper functioning of courts. Indeed, defense counsel conceded that striking a claim may be a remedy reserved for “rare” cases, such as where the plaintiff refuses to engage in the process of determining a manageable trial plan.
However, several justices seemed to have serious reservations about denying trial courts the ability to limit PAGA claims to ensure manageability. As Justice Groban stated pointedly, “Some of us are concerned” about a situation where (in his example) multiple Labor Code violations are alleged, hundreds or thousands of employees are at issue, and different work sites and different types of employees are at issue (everyone from janitors to accountants). Justice Groban asked why, in that case, the court could not say, “We can’t have the janitors and accountants in one trial. I’m going to limit it to the accountants.”
Other justices raised similar concerns. Even Justice Liu—who authored the Iskanian and Adolph decisions and has been perhaps the Court’s most vocal critic of employers’ positions in PAGA cases—seemed to acknowledge that in extreme cases, courts may need recourse if manageability concerns threaten to overwhelm the proper functioning of the judiciary.
Estrada may not be the end of the story, because a decision that trial courts may limit (but not strike) PAGA claims will likely just raise additional questions to be further hashed out in the lower courts. One obvious question that appears outside the scope of review in Estrada is what test trial courts should apply when determining whether a case requires judicial intervention in order to be made “manageable.” Other questions may include when in the proceedings trial courts may decide a case is unmanageable as pled, and what demands trial courts should make on PAGA plaintiffs to demonstrate manageability (such as presenting a written trial plan).
The Court must issue its decision within 90 days (i.e., by February 2024), but could choose to rule sooner. Employers will need to keep their fingers crossed in the meantime, and of course, could still be disappointed. However, Wednesday’s argument should provide employers some hope that they have at least fought plaintiffs to a draw on the manageability issue.
A California semiconductor manufacturer cannot pursue in court its claims of trade secret misappropriation against a rival company while simultaneously arbitrating the same claims against the allegedly larcenous employee, a state appeals court recently found.
In Mattson Technology, Inc. v. Applied Materials, Inc., a California Court of Appeal ruled that the trial court erred by not staying Applied Materials’ trade secret misappropriation claims against rival Mattson Technology while Applied pursued in arbitration the linked misappropriation claims against the ex-employee who allegedly absconded with confidential information to Mattson.
Both Mattson and the ex-employee, who signed an arbitration agreement with Applied as part of his employment contract with the company, had moved to compel to arbitration Applied’s claims against them, with differing levels of success. The trial court granted the ex-employee’s motion but not Mattson’s. The trial court also denied Mattson’s motion to stay the litigation against it while Applied’s claims against the ex-employee continued in arbitration.
The appeals court agreed with the trial court’s ruling that Mattson could not compel Applied’s claims against it to arbitration, as Mattson was not a party to Applied’s arbitration agreement with the ex-employee. However, the appeals court found the trial court erred by not staying those claims until the ex-employee’s arbitration was resolved.
Section 1281.4 of the Code of Civil Procedure requires a court to stay an action or proceeding where the court “has ordered arbitration of a controversy which is an issue involved in an action or proceeding” unless the controversy is “severable.” The appeals court disagreed with the trial court’s determination that Applied’s claim against Mattson was independent of and therefore “severable” from Applied’s claim.
We will continue to monitor this case for any updates.
In what has become an annual tradition, California – that fabled workers’ paradise on earth – has enacted a slew of new laws that, come January, may keep even the most hearty HR professionals up at night.
As we reported earlier this year (here), the California Chamber of Commerce initially identified 11 “Job Killer Bills” that were introduced early in the legislative session, but only three of those bills made it into the statute books. The other eight either died in committee, were amended to be more palatable to employers, or were vetoed by the Governor.
So, here is a brief description of the new crop of employment laws that you should know about before they become effective on January 1, 2024:
|Summary & Impact on Employers
|More Paid Sick Leave. As we reported here, SB 616 increases the amount of paid sick leave employers are required to provide employees from 3 days (24 hours) to 5 days (40 hours). Tagged a “Job Killer” bill, it also raises the total amount of paid sick leave employers must permit employees to accrue and carry over from one year to the next from 6 days (48 hours) to 10 days (80 hours).
|SIGNED INTO LAW
|Another Assault on Arbitration. As we have reported below, one of the things the California Legislature loves to hate the most is arbitration. In a seemingly clear deviation from existing US Supreme Court precedent and the Federal Arbitration Act (“FAA”), this “Job Killer” statute amends California Code of Civil Procedure § 1294 (based upon a statute that has been on the books since at least 1927) to eliminate the long-standing automatic stay of trial court proceedings that takes effect while an appeal is pending from the denial of a motion to compel arbitration. This means a trial court judge will have the discretion to order an employer to continue litigating in court (including going through with a jury trial) even while the employer is challenging on appeal a denial of its right to arbitrate. Only time will tell if this new law will be struck down by a federal court applying the FAA.
|SIGNED INTO LAW
Right of Recall for Grocery Store/Distribution Center Employees. Existing law establishes grocery worker retention provisions that require a buyer of an existing grocery store to retain employees for a 90-day transition period, during which an employee may only be discharged for cause and must be considered for continued employment after the transition period. The existing definition of “grocery establishment” means a retail store that is over 15,000 square feet in size and that sells primarily household foodstuffs for offsite consumption. Another “Job Killer” bill, this law broadens the statute to include “distribution centers” owned and operated by a “grocery establishment” regardless of square footage.
Creating a new private right of action, the new law also grants employees, union representatives and nonprofit corporations the ability to file an action in court for violation of an employee’s right under this law. Potential damages include civil penalties, liquidated damages, reinstatement, lost wages and benefits, punitive damages, attorney’s fees and costs.
|SIGNED INTO LAW
|Minimum Wage Increase for Health Care Workers. The new law provides for a multi-faceted statewide minimum wage schedule for healthcare workers employed by certain covered healthcare facilities. The definition of “covered health facility” applies to nearly every type of health care facility, except those owned, controlled, or operated by the California Department of State Hospitals and certain tribal clinics and outpatient facilities. SB 525 consists of 5 separate minimum wage schedules for covered health care employees depending on the nature, size, and structure of the employer’s business. The law applies to “covered health care employees,” which includes a broad array of positions, from patient care roles like nurses and physicians to support positions such as janitors and clerical workers. It also extends to contracted or subcontracted employees when the healthcare facility has control over their wages, hours, or working conditions. The wage increases go into effect beginning June 1, 2024. Because of amendments that allow for phased minimum wage increases based on hospital size and operations, the Chamber of Commerce withdrew its “Job Killer” tag. The framework of this new law is extremely nuanced, and we suggest reaching out to counsel with questions about its application and interpretation.
|SIGNED INTO LAW
COVID-19 Right of Recall Extended. As we reported here in 2021, SB 93 required certain employers in the hospitality and service industries to rehire employees laid off due to the COVID-19 pandemic. SB 723 moves the expiration of this “right of recall” for hospitality and service industry employees from December 31, 2024 to December 31, 2025 and adds a presumption that separation due to lack of business, reduction in force, or other economic, non-disciplinary reasons is due to a reason related to the COVID-19 pandemic.
Initially, the bill presumed all layoffs were due to the pandemic without the opportunity for employers to submit evidence to the contrary. The Chamber of Commerce withdrew its “Job Killer” tag after amendment.
|SIGNED INTO LAW
|Prohibition Against Non-Compete Agreements. This bill establishes that any contract that is void under California’s non-compete prohibition is unenforceable regardless of when and where the contract was signed. It also prohibits an employer from attempting to enforce a contract that is void, regardless of whether the contract was signed and the employment was maintained outside of California. Thus, SB 699 invalidates non-competes that were signed by employees working in states that allow such agreements, where the employee thereafter moves to California to take a job in California. An employer that enters into or seeks to enforce an unlawful noncompete will be considered to have committed a civil violation. Further, employees may sue for violations of this new law and seek recovery of damages, injunctive relief, and attorneys’ fees.
|SIGNED INTO LAW
|Codification of Non-Compete Ban. This bill codifies the holding in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), which states that any non-compete, no matter now narrowly tailored is void. It also clarifies that California’s invalidation of noncompete agreements is not limited to contracts in which the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract. Additionally, AB 1076 creates a new notice requirement by which employers must notify current and former employees in writing by February 14, 2024 of any earlier-signed noncompete clause or agreements that are void.
|SIGNED INTO LAW
|Leave for Reproductive Loss. This bill allows for unpaid leaves of absence for reproductive-related losses, such as a failed adoption or surrogacy, miscarriage, stillbirth, or unsuccessful assisted reproduction. The leave must be taken within 3 months of the event. If an employee experiences more than one reproductive loss event in a 12-month period, the employer is not obligated to grant more than 20 days of leave. Unless existing company policy provides for paid leave, the leave entitlement is unpaid, but employees may still use other leave balances, including accrued available sick leave.
|SIGNED INTO LAW
|Expansion of Marijuana-Use Protections. This bill expands AB 2188, which passed last year (and which we discussed here). With some exceptions, AB 2188 prohibits discrimination in hiring, terminating, or any other term of employment on the basis of: (1) a person’s use of cannabis off the job and away from the workplace; and (2) an employer-required drug screening test that has found the person to have non-psychoactive cannabis metabolites in their hair, blood, urine, or other bodily fluids. SB 700 also makes it unlawful to discriminate against a job applicant based on information regarding prior use of cannabis that is learned from a criminal history report. Like SB 700, AB 2188 goes into effect on January 1, 2024.
|SIGNED INTO LAW
Retaliation Rebuttable Presumption. SB 497 creates a rebuttable presumption of retaliation under Labor Code sections 98.6 and 1197.5 if an employer engages in any adverse action within 90 days of an employee’s protected activity (e.g., making complaints or claims related to rights under the jurisdiction of the Labor Commissioner, making complaints about unpaid wages, or making complaints about equal pay violations). This presumption makes it easier for employees to establish a prima facie case and significantly more difficult for employers to obtain dismissal of such retaliation claims at the summary judgment stage.
The bill also increases the civil penalty imposed on an employer under section 1102.5 from $10,000 generally to $10,000 per employee per violation.
|SIGNED INTO LAW
The “Job Killer Bills” that did not make the cut this year are listed here:
|Summary & Impact on Employers
|No Unemployment for Striking Employees. SB 799 would have allowed striking workers to obtain unemployment benefits when they choose to strike. Because employers pay the UI fund, had it become law, SB 799 would have forced employers to effectively subsidize striking employees at unrelated businesses, increased taxes on employers, and put the state into further debt.
|No Protected Status for “Family Caregiver”. In a second loss in as many years for Assemblymember Wicks, Governor Newsom vetoed this bill to expand California’s Fair Employment and Housing Act (“FEHA”) to include “family caregiver status” as a protected characteristic (along with race, religion, color, national origin, disability, sexual orientation, etc.). In a refreshingly out-of-character veto message found here, the Governor admitted the ambiguity of the bill would make it “difficult to implement and lead to costly litigation for employers in California.” Assemblymember Wicks proposed a similar bill last year, which sought to add “familial responsibilities” as a protected category under FEHA but did it not advance beyond the Assembly.
|Chain Employers Free from Chains of Employee Transfer Rights. If signed into law, SB 627 would have required chain business employers sharing a brand and parent company that have 100+ locations nationwide to (1) provide 60 days’ notice before closing any location of the chain business; and (2) provide employees of the closing location who have worked for the chain for at least six months the opportunity to remain employed and transfer to another chain business location within 25 miles of the closing location as positions become available. Governor Newsom recognized the arbitrary and ambiguous nature of the law and significant burden on employers in his veto message.
|Employer Speech. SB 399 would have prevented employers from requiring employees to attend meetings in which the employer could share its opinions on religious or political matters, including unionization. It also would have provided a private right of action for employees who believed they suffered discrimination, retaliation, or other adverse employment action from their refusal to attend an employer-sponsored meeting.
|FAILED IN COMMITEE
|No Presumption Of Illness or Injury for Hospital Employees Seeking Workers’ Compensation Benefits. This bill would have added new provisions to the Labor Code creating a rebuttable presumption that certain illnesses and injuries suffered by hospital employees who provide direct-patient care were incurred in the course of their employment, for the purpose of claiming workers’ compensation benefits. The bill would have significantly increased costs for public and private hospitals and been a further drain on the workers’ compensation system. Like the identical bill (SB 213) proposed last year, this bill died in committee.
|FAILED IN COMMITEE
|Blanket Prohibition on Consideration of Conviction History in Employment. This bill would have prohibited nearly every employer from considering the criminal conviction history of an applicant or existing employee in employment decisions, regardless of how the information was obtained, and would have imposed cumbersome processes on employers blocking them from refusing to hire individuals with certain convictions. Employers also would have been prohibited from asking employment applicants to share with an employer their personal social media accounts.
|FAILED IN COMMITTEE
So, there they are! Another year, another avalanche of shiny new employment laws on the statute books of the Golden State. And although some of this year’s “Job Killers” didn’t cross the finish line, we’re sure they still remain a glint in some lawmaker’s eye, because there’s always next year! We will continue to monitor the application and enforcement of these new laws and provide relevant updates as needed.
Last week, the California Legislature passed Senate Bill 616 (“SB 616”), an amendment to California’s statewide paid sick leave law that significantly increases the amount of leave that employers need to provide and permit employees to carry over from year-to-year. The bill was sent to Governor Newsom on Wednesday, and he is expected to sign it into law.
Many employers in California’s major population centers already provide well in excess of the three days required under current state law. Santa Monica and several cities in the San Francisco Bay Area already mandate that employers provide up to 72 hours of paid sick leave, and California’s most populous city—Los Angeles—requires up to 48 hours per year. However, for employers with workers outside these areas, SB 616 will significantly expand their sick leave obligations.
SB 616 increases the minimum amount of sick leave time eligible employees must accrue each year from 24 hours (three days) to 40 hours (five days). The bill preserves the existing accrual rate—i.e., one hour accrued for every 30 hours worked—but employers may use a different accrual method as long as eligible employees accrue: (a) no less than 24 hours (or three days) of paid sick leave by the end of their 120th day of employment; and (b) no less than 40 hours (or five days) of paid sick leave by the end of their 200th day of employment.
While the current law permits employers to cap annual sick leave usage to 24 hours or three days per year, SB 616 expands the permissible annual usage cap to 40 hours or five days. SB 616 also raises the total amount of paid sick leave that employers must allow employees to accrue over time and carry over from one year to the next from 48 hours (or six days) to 80 hours (or 10 days).
Employers who prefer to use an up-front sick leave allocation—a popular method due to its relative administrative ease—will now need to deposit 40 hours (or five days) of sick leave in employees’ leave banks each year.
Although SB 616 continues to include an exception for employers covered by a valid collective bargaining agreement (“CBA”) that provides for paid sick leave, subject to certain conditions, it requires that such employees be permitted to use sick leave for the same reasons as employees who are not subject to a CBA.
Given that the Governor is expected to sign SB 616 into law, California employers should plan to review their sick leave policies and practices before the end of the year.
We invite you to review our newly-posted September 2023 California Employment Law Notes, a comprehensive review of the latest and most significant developments in California employment law. The highlights include:
A two-year standoff between the fast food industry and labor unions ended this week as stakeholders announced a deal that will increase the minimum wage to $20 for California workers at fast food chains with more than 60 locations nationwide.
As we previously reported, in September 2022, California passed A.B. 257, which created a 10-member fast-food council with authority to set wage, hour, and working condition standards for fast food workers in California. The law was vehemently opposed by the fast-food industry, who claimed the law would devastate the industry. Opponents raced to gather enough signatures to qualify for a referendum on the November 2024 ballot to repeal the law, and on January 13, 2023, a Sacramento judge issued a preliminary injunction that prevented the law from taking effect until California voters decided the fate of the referendum.
In response to the referendum, the Legislature introduced a separate bill in February 2023, A.B. 1228, that would make fast food franchisors jointly liable for labor violations committed by their franchisees, potentially upending the franchise model that dominates the industry. A.B. 1228 was passed by the State Assembly in June but has not yet been approved by the Senate. Over the summer, California lawmakers also attempted to revive the Industrial Welfare Commission (“IWC”), which was defunded almost two decades ago. A revived IWC would have the authority to pass regulations to protect fast food workers in the event A.B. 257 was repealed.
Last week’s compromise, detailed in changes to A.B. 1228, appears to put an end to this legislative arms race for now. Pursuant to the deal, the $20 fast food minimum wage will take effect April 2024, and the referendum to repeal A.B. 257 will be withdrawn. In exchange, the franchisor joint liability provision will be taken out, the IWC will remain unfunded, and certain modifications will be made to the fast-food council created in A.B. 257 to give it less sweeping powers and ensure it has representatives from industry and franchisees.
The bill was approved by the California legislature on Thursday and is expected to be signed into law by Governor Gavin Newsom. When their wage rate increases to $20 per hour in April 2024, fast food workers will have the highest minimum wage in California.
The Ninth Circuit recently issued an opinion that signals some movement in the direction away from enforcing employment-related arbitration agreements.
In Miller v. Amazon.com, Case No. 2:21-cv-00204-BJR, the Ninth Circuit affirmed the district court’s order denying Amazon’s motion to compel arbitration in a case brought by Amazon Flex delivery drivers who made last-leg deliveries of goods shipped from other states or countries to consumers, as well as tip-eligible deliveries of food, groceries, and packages stored locally. In the complaint, the plaintiffs alleged that Amazon violated state laws by failing to honor its promise that workers would receive 100% of the tips that customers added for deliveries of local goods.
Amazon argued that the Ninth Circuit’s decision in Rittmann v. Amazon.com was no longer good law in light of the U.S. Supreme Court’s decision in Southwest Airlines Co. v. Saxon. In Rittmann, the Ninth Circuit held that Amazon Flex delivery drivers—like the plaintiffs in Miller—were exempt from the Federal Arbitration Act (“FAA”) because they were workers engaged in interstate commerce since they delivered goods shipped from other states or countries to their final destination. Amazon argued Rittmann was no longer good law because in Saxon, the Supreme Court explained that courts must look at the workers’ own activities rather than the activities of the business for which they worked when determining whether an employee belongs to a class of workers engaged in interstate commerce under § 1 of the FAA. The Court declined to revisit its decision in Rittmann and stated that Rittmann remains binding precedent after Saxon.
Amazon also argued that, even if Rittmann remained good law, the Court should find that the FAA applied to the plaintiffs in Miller because they differed from the plaintiffs in Rittmann since they scheduled tip-eligible local deliveries, which did not involve interstate commerce. The Court rejected Amazon’s argument holding that plaintiffs were the “exact same class of workers we discussed in Rittmann: Amazon Flex delivery drivers who ‘are engaged to deliver packages from out of state or out of the country, even if they also deliver food from local restaurants.’” Accordingly, the plaintiffs were engaged in interstate commerce—even if that engagement also involved intrastate activities. Relying on Saxon, the Court noted that “the relevant question is what work ‘the members of the class, as a whole, typically carry out,’ which here includes last-mile deliveries.” Since Amazon Flex delivery drivers have “one contract of employment which governs all of their work, including shifts for last-mile deliveries and shifts for tip-producing deliveries,” the plaintiffs in Miller—like in Rittmann—were exempt under § 1 of the FAA.
Finally, Amazon argued that even if plaintiffs were exempt under the FAA, the arbitration provision should be enforced under state law. Again, the Court disagreed explaining that no state law applied to plaintiffs’ arbitration provision. While a subsequent amendment to the arbitration agreement required enforcement of the provision under Delaware state law, the amendment did not apply to the plaintiffs because their agreement stated that any modifications to the arbitration provision would not apply to claims that accrued or to disputes that arose prior to such modification, as was the case here.
Notably, in both Miller and Rittmann, the Ninth Circuit adopted a somewhat broad interpretation of Saxon and shielded employees from forced arbitration. Given the recent criticism of employment-related arbitration agreements, these cases suggest a continued shift away from enforcing such agreements. We will continue to closely monitor these developments.
On September 1, 2023, California Governor Gavin Newsom signed Senate Bill 699, which amends California Business & Professions Code Section 16600 to prohibit an employer from entering into or attempting to enforce a non-compete agreement regardless of whether the contract was signed outside of California. The law goes into effect on January 1, 2024.
Previously, California law banned non-compete agreements, subject to limited exceptions. Section 16600 of the California Business and Profession Code states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” By adding Section 16600.5 to the Business & Professions Code, SB 699 expands the restrictions on non-compete agreements to contracts entered outside of California.
The legislative findings in the bill detail the public policy interests driving the expansion of Section 16600. While non-compete clauses in employment contracts are extremely common throughout the United States, research has shown that they “stifle economic development, limit firms’ ability to hire[,] and depress innovation and growth.” The legislature suggested that California has “benefited significantly” from prohibiting non-compete agreements, “fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development.” Since “the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.” SB 699 preserves California’s competitive business interests by “protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California.”
Under the new law, any contract that is void under Section 16600 is unenforceable “regardless of where and when the contract was signed.” It prohibits “an employer or former employer from attempting to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California.” Furthermore, the law provides that an employer who violates the law commits a “civil violation.” To that end, it authorizes an employee, former employee, or prospective employee to bring a lawsuit to enforce the law by seeking injunctive relief, actual damages, or both, and entitles a prevailing employee to recover reasonable attorneys’ fees and costs.
Notably, SB 699 cements California’s public policy interests against non-compete agreements and expands employees’ enforcement rights for challenging non-compete agreements in California. The law will likely lead to even more legal battles between California employers and out-of-state employers seeking to prevent former employees from working for California competitors. It will be interesting to see the effect that SB 699 will have on out-of-state employers that have secured a judgment enforcing a non-compete in another state, such as in Advanced Bionics Corp. v. Medtronic, Inc., 29 Cal. 4th 697 (2002), in which the California Supreme Court held that comity principles impose limits to the scope of Section 16600 and to the reach of California’s public policy disfavoring non-competes.
In Advanced Bionics, an employee signed an enforceable non-compete in Minnesota with Medtronic and thereafter resigned his employment and went to work for Advanced Bionics, a California competitor to Medtronic. Simultaneous litigation ensued in both California and Minnesota, but the California Supreme Court declined to apply California law voiding non-competes to the Minnesota agreement, explaining that “exceptional circumstances [did not exist] that outweigh[ed] the threat to judicial restraint and comity principles.” While it remains to be seen how if at all SB 699 will be harmonized with the comity principles set forth in Advanced Bionics, the new law will make it more likely than ever that out-of-state employers will commence litigation early and often against employees in their home jurisdictions who are moving to California in an effort to enforce the non-compete before a California court can get around to striking down the provision.
We will continue to closely monitor these developments.