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California is known for its strict prohibitions on the use of noncompete agreements and noncompete clauses in agreements (together and individually a, “Noncompete Agreement”), particularly in the employment context. Laws effective January 1, 2024, take these prohibitions further by applying them to certain out-of-state employees and employers, giving employees a private right of action if there are employer violations, and requiring employers to provide notice to current and former employees that have entered Noncompete Agreements. (See Sections 16600, 1660.1, and 16600.5 of the California Business and Professions Code).

What are the Key Changes?

The key new terms of the California noncompete law do the following:

  1. Codify the California case law by confirming all employee Noncompete Agreements, no matter how narrowly tailored, are void unless they meet very limited statutory exceptions, which are generally applicable only in a business sale context.
  2. Require employers who have entered into Noncompete Agreements to notify current and certain former employees by February 14, 2024, that the Noncompete Agreement is void.
  3. Prohibit enforcement of Noncompete Agreements even if the agreement was signed outside of California or the employee works outside of California.
  4. Give employees (former, current, and prospective) a private right of action to recover damages or obtain an injunction if an employer violates these laws. Attorney’s fees can be recovered by the prevailing employee.
  5. Deem employer violations of the noncompete laws a violation of unfair competition laws, which create additional liability for companies.
  6. Claim that any Noncompete Agreements are unenforceable, regardless of where they are signed and when they are signed.

Impact on Franchisors

These new laws primarily expand employer liability regarding Noncompete Agreements. The earlier law that limited the enforceability of Noncompete Agreements between franchisors and franchisees is still in effect. However, the question of how these additional employer restrictions will be interpreted to apply to the business-to-business context (franchisor to franchisee) is significant and still open.

Franchisors with franchisees in California or employees in California should consider the following:

  1. If the franchisor is an employer of California-based employees and the franchisor has entered into Noncompete Agreements with its employees, the franchisor may need to comply with the new notice requirements.
  2. If the franchisor has franchisees in California who have entered into Noncompete Agreements with franchisee employees, franchisors need to weigh the risks and benefits of notifying franchisees about the new laws. If a franchisor has required its California franchisees to use Noncompete Agreements with franchisee employees, the franchisor may have a stronger interest in notifying the franchisee.
  3. California-based franchisors may be prohibited from entering into or enforcing Noncompete Agreements with any employees, regardless of the employee’s location. California-based franchisors must decide if notices will be sent to their out-of-state employees.
  4. Franchisors may not be able to enforce Noncompete Agreements with employees who initially resided or worked outside of California at the time the Noncompete Agreement was signed but then relocated to California.
  5. Franchisors doing business in California may want to increase the disclosures about the use and enforceability of Noncompete Agreements in their franchise disclosure documents and adjust the terms of the franchise agreement or state addendum.

The above considerations are also relevant to any affiliates of a franchisor who may operate corporate units for the brand.

Note that courts have been increasingly likely to treat a non-solicitation agreement as being equivalent with noncompete agreement. Although these new laws do not expressly address non-solicitation agreements, plaintiffs may argue that the laws apply. Franchisors may want to evaluate if they will treat non-solicit agreements the same as noncompete agreements for purposes of complying with California law.

It is likely that some elements of these laws will be challenged in court so stay tuned for further updates.

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