No Way Around It: SB 1241 Further Restricts Non-Compete Agreements For California Workers

Companies often seek to protect their trade secrets by requiring employees to sign non-compete agreements. California law invalidates such provisions except in very limited circumstances. See Bus. & Prof. Code §§ 16600 et seq. With the recent passage of a new statute, the ability of employers to enforce such agreements against California employees is more restricted than ever.  

On September 25, California Governor Jerry Brown signed Senate Bill 1241, which adds Section 925 to the Labor Code and prohibits employers from requiring employees who primarily reside and work in California to sign forum selection or choice of law provisions as a condition of employment. Among other things, this law will limit a company’s ability to circumvent California law disfavoring non-competes by requiring employees to adjudicate employment disputes outside of California or according to the laws of another state.

Common law governing forum selection and choice of law generally favors the courts and law of the state where a case or controversy arises, but that preference can often be overridden by contract. SB 1241 now mandates in most cases that the common law rule apply to employment agreements with California employees. Previously, some California courts (especially federal courts) enforced forum selection clauses in employment agreements, even where doing so might result in non-compete provisions being enforced.

Key Provisions of SB 1241

Under SB 1241, an employee who “primarily resides and works in California” may void any provision of an employment contract that:

(1) Requires the employee to litigate or arbitrate outside of California a claim arising in California; or

(2) Deprives the employee of the substantive protection of California law with respect to a controversy arising in California.

While early drafts of the bill made these prohibitions absolute, amendments allowed for exemptions where employees are individually represented by counsel in negotiating contract terms.

The new law goes into effect on January 1, 2017 and applies only to agreements entered into, modified, or extended on or after that date.

Effect of SB 1241

While SB 1241 restricts the use of forum selection and choice-of-law provisions in employment agreements, it does not call for their wholesale elimination. The law does not penalize employers for including such provisions in their employee agreements, and they will continue to be enforceable in certain circumstances.

As a preliminary matter, the law applies only to claims and controversies arising in California. Where claims and controversies arise in other states, employees are not afforded the law’s unilateral right to void forum selection and choice-of-law provisions.

Even where controversies do arise in California, the employee’s right is elective. Though it is difficult to imagine that an employee would opt not to invalidate a forum selection or choice-of-law provision where the employee’s right to work for another employer is at stake, there may be other situations in which an employee would allow such a provision to be enforced.

Also notable is that the legislation only applies where employees are not represented by counsel when negotiating an employment agreement. Thus, for example, top executives and other high-value employees who retain counsel to help them negotiate an employment agreement will not benefit from the law. Conceivably, some companies might even encourage prospective employees to obtain representation and thereby avoid the statute – though this strategy might backfire if counsel for the prospective employee pushes back on contract provisions that the company wants.

Employers may also seek to avoid application of the statute in other ways. For example, the familiar race to the courthouse is likely to still be in play, since the courts of other states may apply their own law in determining whether a forum selection or choice of law provision in an employment agreement is enforceable. And the statutory provision limiting the enforcement of arbitration provisions is likely to face a challenge under the Federal Arbitration Act.

At minimum, companies would be wise to ensure that any forum selection or choice of law provisions in an employment agreement are accompanied by effective severability clauses in case they become the subject of litigation under the new law.