Review equity award agreements + other employment-related contracts ASAP to avoid costly penalties
In brief
Last fall California doubled-down on the state’s hostility to noncompete agreements. Assembly Bill 1076 codified the landmark 2008 Edward v. Arthur Andersen decision that invalidated all employment noncompetes, including narrowly tailored ones, unless they satisfy a statutory exception.
AB 1076 also added new Business & Professions Code §16600.1, requiring California employers to notify current (and certain former) employees that any noncompete agreement or clause to which they may be subject is void (unless it falls within one of the limited statutory exceptions).
Individualized written notice must be sent by 14 February 2024 or significant penalties may apply.
Notice must be provided to all current and former employees to whom all of these conditions apply:
- They were employed by the company after 1 January 2022.
- They are located in California.
- They are bound by or entered into an employment-related agreement containing a noncompete provision, customer nonsolicitation provision or other similar provision that is unenforceable under California law.
The notice must inform employees that the provisions are void in California. Notice must be written and delivered to the employee’s last known postal address and email address. Failing to provide such notice constitutes a violation of the state’s Unfair Competition Law, which carries civil penalties.
Special considerations for compensation & benefit professionals
What may fall under the radar is AB 1076’s implicit requirement to carefully review all employment documentation, including equity and incentive award plans and agreements and other contracts (bonus plans, commission plans, severance agreements), for language that may be construed as a noncompete.
This includes traditional noncompetes that empower an employer to seek a court injunction to prevent a former employee from working for a competitor. But it also captures more limited restraints or penalty clauses, e.g., equity award provisions that require employees to forgo post-employment equity vesting (such as under a retirement clause) if they work for a competitor, but which do not otherwise prohibit competitive activity. Any such “limited restraints” theory is no longer viable in California – all clauses that prohibit post-employment competition are void even if they impose only financial penalties for competition rather than an outright ban on working for a competitor.
Equity and benefit plan professionals may not be aware of AB 1076’s impact on their “world,” and similarly, in-house employment counsel are often not aware of the fine print details contained within equity or benefit plan documents. However, to ensure that no prohibited noncompete is overlooked, it is important for compensation and employment professionals to coordinate on their approach to AB 1076, especially given that failure to provide requisite notice may trigger significant penalties. Under the statute, violations will be deemed an act of unfair competition and subject to civil penalties up to USD 2,500 per violation. For large employers, the damage could be enormous and surprising.
Yes, customer nonsolicitation agreements count too
AB 1076 prohibitions and notice provisions also impact customer nonsolicitation agreements which are considered the same as noncompetes under California case law.
Action items
- Review all compensation and employment arrangements with current and former California employees, including equity and incentive award plans and agreements, to identify prohibited restrictions.
- Draw up your compliance plan and create your notice list, bearing in mind:
- Current employees who were previously bound, but are no longer bound due to a plan or contract amendment, may need to be notified. The statute isn’t clear – the conservative approach is to notify, but the practical approach is that if they were not bound as of the effective date of the new law (1 January 2024), they are not a party to a contract with a noncompete and notice should not be required.
- Former employees who worked post 1 January 2022 and who are subject to a viable noncompete need to be notified.
- Employees with expired noncompetes who worked post 1 January 2022 arguably would not need notice because there is no point in notifying them that their already-expired noncompete is no longer effective.
- Former employees who left before a plan amendment eliminating a noncompete might need notice if they wouldn’t otherwise know the plan was amended.
- For grey areas or sample notices, please contact your Baker McKenzie attorney.
