California is known for having the most aggressive approach among the states regarding restraints on profession, trade, and business. Specifically, California Business and Professions Code section 16600 codifies this approach: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”Prior case law examining section 16600 in the employment and sale of business context has unequivocally held that such restraints are unlawful per se unless one of the exceptions set forth in sections 16601, 1602, and 1602.5 applies.
California has a strict code section that declares that covenants not to compete are unlawful except in limited circumstances.California Business and Professions Code Section 16600:“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.”Section 16600 has some statutory exceptions (e.g., qualifying sale of a business (Section 16601)), but often operates as a per se rule against noncompete clauses in contracts.
The drug development went according to plan until Forward decided to withdraw from the agreement, as allowed by its terms, pursuant to a settlement with third-party Biogen. Under its agreement with Biogen, Forward agreed to avoid all partnerships with companies dealing in similar drugs.Ixchel sued Biogen in federal court for tortiously interfering with Ixchel’s contractual and prospective economic relationship with Forward, claiming that Biogen did so in violation of California Business and Professions Code section 16600. After losing in the district court, Biogen appealed to the Ninth Circuit, which asked the California Supreme Court to decide, inter alia, how Section 16600 applies to the settlement provision requiring Forward to terminate its agreement with Ixchel.
Dr. Golden argued that because the no-employment provision constitutes a material term of the agreement, the entire agreement is void. California Business and Professions Code section 16600 provides 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." Courts have used this statute to regulate or void covenants not to compete (also called non-compete agreements or clauses).
Under California Business and Professions Code Section 16600 (“Section 16600”), “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” California courts interpret this statute broadly and have routinely invalidated covenants not to compete as violating Section 16600 based on the theory that such covenants contravene California’s public policy in favor of free competition and the right of employees to pursue any calling of their choosing.
The first was whether a plaintiff in a dispute between businesses is required to plead an independently wrongful act in order to establish a claim for tortious interference with a contract that is terminable at-will, to which the court responded, yes. The second question was what is the proper standard for determining whether California Business and Professions Code section 16600 (Section 16600) voids a non-competition agreement between two businesses, to which the court responded, the Rule of Reason.In addressing the first issue, the court noted that in Reeves v. Hanlon, 33 Cal.4th 1140 (2004), it had held that a plaintiff was required to plead independent wrongfulness to a state a claim for interference with a specific category of at-will contracts: employment contracts. In Ixchel, however, the court declined to limit Reeves solely to the employment context, noting that “the broader logic underlying the decision is persuasive with respect to other spheres of economic relations.”
California enacted two new bills expanding the scope and consequences of the state’s policies against restrictive covenants. Governor Newsom signed Senate Bill 699 into law on September 1, 2023, and Assembly Bill 1076 into law on October 13, 3023. Both are designed to strengthen the protections in California Business and Professions Code Section 16600, which provides 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.” California courts have long interpreted Section 16600 to render noncompete clauses void, and many have recently begun interpreting the statute to negate employee nonsolicit agreements as well. These two new laws amend Section 16600, create two new statutes within the same chapter (Sections 16600.1 and 16600.5), and significantly increase the stakes for employers with restrictive covenants in their contracts.SB 699 creates Business and Professions Code Section 16600.5, which provides that any contract that is void under Section 16600 is unenforceable “regardless of where and when the contract was signed.” While this provision clearly intends to apply California rules to contracts and employees outside of California, it should still be subject to standard choice-of-law analyses. Companies outside of California generally have con
What’s NewCalifornia has long banned noncompete agreements. Under CA Business and Professions Code Section 16600, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The new amendment to this law, SB 699, takes the ban a couple of steps further by adding the following restrictions:Any contract that is void under Section 16600 is unenforceable regardless of where and when the contract was signed.An employer or former employer shall not attempt to enforce a contract that is void under Section 16600 regardless of whether the contract was signed and the employment was maintained outside of California.An employer shall not enter a contract with an employee or prospective employee that includes a provision that is void under Section 16600.An employer that enters a contract that is void under Section 16600 or attempts to enforce a contract that is void under Section 16600 commits a civil violation.(1) An employee, former employee, or prospective employee may bring a private action to enforce Section 16600 for injunc
This year, California was one of many states to enact legislation restricting noncompetes. California has long had the strictest noncompete law, and employee noncompetes are already void under California Business and Professions Code § 16600 (“Section 16600”). On September 1, 2023, California passed new legislation (“SB 699”) that further broadens Section 16600 and provides employees with new legal remedies.The Current LawUnless one of the narrow statutory exceptions applies, Section 16600 provides that any contract restraining a person from “engaging in a lawful profession, trade, or business of any kind” is void. As such, employee noncompete agreements and several other types of restrictive covenants are generally unenforceable in California. Importantly, Section 16600 by itself does not provide employees with a private right of action through which a court may award damages.SB 699Over half of the text of SB 699 is dedicated to legislative findings regarding the prevalence and negative impact of noncompetes across the United States. It is this nationwide context that underscores SB 699’s substantive amendments, which are codified in new California Business and Professions Code § 16600.5 and update the current law in thr
The federal contractor must also include, in every applicable federal subcontract, a provision that the terms of the order will be binding upon all such subcontractors or vendors. Lastly failure to comply with the order may result in the termination or suspension, in whole or in part, of the applicable federal contract.The provisions of the order affecting covered federal contractors applies to all federal contracts entered into on or after November 21, 2020.CA Supreme Court Articulates Rule of Reason for Business Contracts That Restrain TradeIn August 2020, the California Supreme Court, in response to a request from the U.S. Court of Appeals for the Ninth Circuit to clarify California law in a pending federal case, held that California Business and Professions Code Section 16600 does not render void all restraints of trade in business contracts. Rather, in determining whether a B-to-B contractual restriction violates Section 16600, a rule of reason should apply.