California Passes an Act to Strengthen Talent Mobility & Labor Market Competition

I drafted a bill and Governor Newsom signed it on Friday!

SB 699 adds a new section to the Business and Professions Code – 16000.5

Here’s what it does:

1. Any contract that is void under B&P Section 16600 is unenforceable regardless of where and when the contract was signed.
2. An employer or former employer shall not attempt to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California.
3. An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this chapter.
4. An employer that enters into a contract that is void or attempts to enforce a contract that is void commits a civil violation. An employee, former employee, or prospective employee may bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages and is entitled to recover reasonable attorney’s fees and costs.

Our work in academia is so multifaceted – and also never-ending. We wear many overlapping hats: educator, scholar, researcher, teacher, author, expert, collaborator, mentor, institutional leader, community builder, public intellectual, policymaker. A lot of our work will have impact in slow long-hump ways, trickling in indirect paths from scholarly debates and publications to shaping the worlds of law and society. Sometimes though, there comes a moment to celebrate a direct change we helped make a reality. This Friday Governor Newsom signed a bill I drafted that strengthens California's labor market mobility policy. Here is a writeup about the new Act by Littler https://www.littler.com/publication-press/publication/california-reaches-across-state-lines-invalidate-employee-non-compete

California has long held unenforceable post-employment agreements that limit a person’s ability to work in their trade or industry.  This new section 16600.5 reinforces that policy by providing reimbursement of legal fees for employees who successfully defend their rights.  It allows California employers to hire trained individuals in a competitive labor market without fear of reprisal. And it protects employees who want to take jobs in California or with California companies.  It clarifies what the California courts have long recognized: that California’s public policy that voids noncompetes extends to all California-based employers and employees, even if an employee had previously signed a noncompete outside of California.

In my research since my first book, Talent Wants to be Free, I have argued that it is not only the law on the books but the enforcement structure that shape talent mobility. In 2016 I served on President Obama's policy team on noncompetes, resulting in a presidential call to action to the states to curtail the spread of noncompetes. In 2020, I keynoted the first FTC workshop on noncompetes, and in 2021 Mark Lemley and I wrote a Day One Report to the Biden Administration calling for a national solution to the harms of noncompetes. Unlike the majority of other states, California has long recognized the importance of protecting individuals' rights to pursue their lawful profession, trade, or business of their choice. Still, the empirical research shows that noncompete clauses, although illegal under Section 16600 of the Business and Professions Code, remain prevalent in California. Moreover, former employers outside of California attempt to prevent California employers from hiring talented workers by threatening their former employees with litigation.

Over the past two decades, research on the harms of noncompetes has been mounting, leading to the Federal Trade Commission (FTC)’s proposed ban on noncompetes this year. Studies show that noncompetes stifle economic development, limit firms’ ability to hire and depress innovation and growth. Noncompetes are associated not only with suppressed wages and exacerbated racial and gender pay gaps, but also reduced entrepreneurship, job growth, firm entry and innovation. The research further shows that the harms of noncompetes extend not only to employees but to also companies and regional innovation. Noncompetes make it harder to start new companies and cause industries to become more and more concentrated and less dynamic and competitive.

In California, innovation, entrepreneurship and industry growth have all flourished thanks to a highly mobile workforce. For example, variations in state noncompete law have likely contributed to the fact that alumni of Google (based in noncompete-banning California) have been far more prolific than alumni of Microsoft and Amazon (based in noncompete-enforcing Washington state) in starting their own companies and raising capital. In 2016, the U.S. Treasury Department issued a report on noncompetes, finding that increased mobility “raise[s] labor productivity by achieving a better matching of workers and firms, and may facilitate the development of industrial clusters like Silicon Valley.” California’s policy on talent mobility is more than a worker’s rights policy – it is good for business, market competition, innovation and regional development.

SB 699 clarifies that any contract by a California employer which contains a non-compete clause is void under California law is unenforceable. It also prohibits employers from entering into or attempting to enforce contracts that are void under California law and provides remedies for former employees or who are subject to such contracts. The bill provides an enforcement mechanism and strengthens California’s longstanding policy which has been an important contributor to the state’s prospering tech, entertainment, biomedicine, pharma, and other thriving industries.

At the federal level, the FTC is now in notice and comment period on a bill that would ban all employment non-competes as well as de facto non-competes. Here is a comment Mark Lemley and I submitted https://www.regulations.gov/comment/FTC-2023-0007-10461