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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Catherine Skulan: Hello, and welcome to another installment of our Ropes & Gray podcast series on California Law for Asset Managers. I’m Catherine Skulan, a partner in the Ropes & Gray asset management group in San Francisco. On today’s episode, I will be discussing with three of my colleagues—Richard Kidd, Greg Demers, and Patrick Maher—some recent developments in California employment law that impact asset managers and their portfolio companies. Specifically, we’ll touch on a very recent case interpreting a new California noncompete statute, and some new California requirements to implement comprehensive workplace violence prevention plans.
Richard, let’s start with you. Noncompetes are always a hot-button topic for California employers, and especially those in the asset management space. Can we talk about the state of play in 2024?
Richard Kidd: Sure—thanks, Catherine. The starting point for analysis is Section 16600 of the California Business and Professions Code, which has been on the books in one form or another for many years. The current law provides that a contract is void to the extent that it restrains an employee from engaging in a lawful profession, trade, or business. There are generally only three exceptions to this rule: (1) noncompetes in the context of a sale of business, (2) noncompetes arising when a partner leaves a partnership, and (3) noncompetes when a member of a limited liability company (LLC) leaves the company.
Catherine Skulan: Okay, those are the rules. How does it play out in the asset management space?
Richard Kidd: Many will recognize the exception for partners who leave a partnership or members who leave a limited liability company, as many asset management professionals are partners in upper-tier partnerships or members in LLCs, and those relationship agreements typically contain the noncompetition provisions. However, portfolio company employees are often neither sellers of a business, nor partners in a partnership, nor members in an LLC, so any attempt to enter into noncompetes against these employees would generally be unlawful in California and void as a matter of law.
Earlier this year, California went a step further still and passed S.B. 699, which purports to expand the reach of California’s restrictions by prohibiting enforcement of a noncompete that is void under California law regardless of (1) where the employee worked when entering into the agreement or (2) where the agreement was signed.
Catherine Skulan: Let me make sure I understand this—if an employee who lives and works in New York signs a noncompete at the inception of their employment, then moves to California, California’s new law purports to invalidate that clause?
Richard Kidd: That’s correct. Even before S.B. 699, practitioners often thought that if an employee could move to California and convince a California court that California’s public policy against noncompetes trumped another state’s interest, that a California court might invalidate the clause. S.B. 699 has essentially codified what employment lawyers always thought—if you are an employee outside of California who has entered into a noncompete with your employer and you move to California and can get a California court to invalidate your restrictions under California state law, you might be home free.
Catherine Skulan: And that’s a theory that some people have been willing to test. I understand there is a recent case between DraftKings and a former Massachusetts employee who tried to work for a competitor by moving to California. Greg, how did that play out?
Greg Demers: In the DraftKings case, a DraftKings executive signed a restrictive covenant agreement, which was governed by Massachusetts law and contained a one-year post-employment noncompete restriction. In an attempt to avoid the noncompete, the executive moved to California and went to work for a competitor. DraftKings then predictably sued the executive in Massachusetts for breaching his noncompete, among other claims. Earlier this year, a federal district court in Massachusetts ruled in favor of DraftKings, finding the noncompete to be enforceable under Massachusetts law, and enjoining the executive from competing against DraftKings anywhere in the United States for a period of one year.
The executive then appealed the decision, arguing first, that the judge wrongly held that Massachusetts law governed the enforceability of the noncompete and second, that even if Massachusetts law did govern, the judge should have excluded California from the scope of the injunction based on its strong public policy against noncompetes.
Catherine Skulan: And how did that all turn out on appeal?
Greg Demers: On appeal, the First Circuit Court of Appeals, which is the federal appellate court sitting in Massachusetts, was not persuaded by any of the appellant’s arguments. The First Circuit affirmed the preliminary injunction and upheld the nationwide noncompete. In its opinion, the court reasoned that Massachusetts law should govern the noncompete because the executive could not show that California’s public policy against noncompetes outweighed the parties’ agreement to apply Massachusetts law. And it’s noteworthy that the court’s analysis was predicated heavily on the fact that Massachusetts has its own noncompete statute, which has been debated extensively, and which allows for employers to enter into noncompetes, subject to certain conditions laid out in the statute.
One final point here: the Appeals Court also held that California should not be carved out of the nationwide scope of the noncompete on the basis of its public policy against such restrictions. Because sports betting is illegal in California, the court found that the executive would necessarily interact with customers outside of California, meaning that the requested carveout would essentially allow him to skirt the country-wide preliminary injunction by working from California and competing in other jurisdictions.
Catherine Skulan: Richard, does this decision surprise you at all?
Richard Kidd: Not really, because when you think it about, the California legislature is attempting to tell other state’s judges what law should apply to noncompete disputes. However, if the executive had been able to get to a California court to reach a decision first, I think we would have been looking at a different result.
Catherine Skulan: That’s interesting. Greg, how do you think this could have played out differently?
Greg Demers: I think if the employee had not commenced his employment with the competitor and sought a declaratory judgment to void the noncompete after moving to California but prior to engaging in competitive conduct, a California court might have ruled first, and likely would have enforced the California law and invalidated the noncompete restriction.
Catherine Skulan: From a practical perspective then, what does this mean for California asset managers looking to hire workers from out of state, that are subject to another state’s noncompete? And similarly, what does it mean for portfolio companies that might be located outside of California?
Greg Demers: The DraftKings case shows that California’s power to void employee noncompetes is not necessarily as far-reaching as it purports to be. The new statute is broad on its face, but that does not mean that it gives carte blanche for executives to move to California and flout noncompetes that they executed in other states, often in exchange for substantial consideration. There is a risk that such an employee could be stuck in costly litigation in another state, only to have the out-of-state court enforce the restriction. So, out-of-state employers may be emboldened to challenge the application of the California law in those circumstances.
Catherine Skulan: Are there any other takeaways that California employers should consider?
Greg Demers: Yes, another important point here: the First Circuit may have provided guideposts for California employers to prevail in enforcing the California statute outside of California. The fact that Massachusetts has its own noncompete statute, which significantly limits the enforceability of noncompetes against certain workers, factored heavily into the court’s analysis here—specifically, that California’s public policy against noncompetes did not materially outweigh Massachusetts’s interest in enforcing them. A judge in a state that does not have a specific noncompete statute, or that has less developed law around noncompetes, might more readily defer to California’s well-developed public policy. And therefore, a prospective employee’s location may play a role in an asset manager’s risk assessment on these issues.
California employers would have a stronger argument to invalidate an out-of-state noncompete if the employee moves to California for a position that requires in-office attendance and provides services to California-based clients—which, again, was not the case here. Courts also would likely look less favorably on an employee who temporarily moved to an asset manager’s California office, or worked part-time out of that office, for purposes of invalidating their noncompete, only to move back home or to another location to then engage in competitive activities.
So, asset managers and their portfolio companies should be wary of intra-company transfers of employees to California and should carefully document any short-term relationships, such as secondments, to make clear that any such moves are not permanent.
Catherine Skulan: Great—thank you both. This really covers a lot of important new updates, and deals with issues that we come across a lot in our work with asset managers.
Shifting gears, let’s talk about the requirements for California employers to institute workplace violence prevention plans, which is another new law our asset manager clients have asked us about. Pat, could you tell us a little about this?
Patrick Maher: Thanks, Catherine—yes. California implemented a new requirement, as of July 1, 2024, whereby virtually all California employers must implement a comprehensive workplace violence prevention plan. So, this is something that asset managers and portfolio companies with offices in California need to be aware of and implement, if it’s applicable, for legal compliance purposes.
It’s also noteworthy that in addition to publishing a written plan, employers must begin to assess and resolve workplace violence hazards, train their employees, and implement investigation and recordkeeping processes.
Catherine Skulan: You said “virtually all”—are there any key exemptions from the law that we should think about?
Patrick Maher: There are exemptions for certain health care facilities (which are already subject to regulations relating to workplace violence under a separate statute), for law enforcement agencies, and facilities operated by the Department of Corrections and Rehabilitation, but the most relevant for our purposes are exemptions for:
i. Employees teleworking from a location of the employee’s choice, which is not under the employer’s control; and
ii. Worksites with less than 10 employees “at any given time” that are “not accessible to the public” and comply with California’s existing requirements for establishing and maintaining an injury and illness prevention program.
Catherine Skulan: Now, putting a program together for even one office requires considerable care and thought. What if you have multiple offices in California—how do employers have to think about their program in that case?
Patrick Maher: If there are different hazards at the different locations, then the employer’s workplace violence prevention program must be customized to the hazards of the particular location. For example, the plan for a large office in a dangerous area must address different hazards than a small office in a remote office park. If the employer has consistent or similar hazards across worksites, the workplace violence prevention plan may be consistent across the locations.
It’s also important to note that covered employers include multi-employer worksites, such as shared offices, such that employers may need to work with their landlord or other employers sharing the workspace to coordinate the implementation of their workplace violence prevention plans.
Catherine Skulan: Now, what about the exemption for worksites with fewer than 10 employees—is that fairly clear cut?
Patrick Maher: That exemption only applies if the worksite is also “not accessible to the public,” which is a term that’s not defined in the law and has not been given any meaning in current guidance from regulators. But we expect that most all workplaces of asset managers and their portfolio companies are “open to the public” in some respect, as they host clients, receive mail and deliveries, or can be available to people with personal relationships to the workers, such as family members and significant others. We think it makes sense to consider the law through that broader lens because the law outlines various types of workplace violence, including violence directed at employees by customers, clients, and other visitors or by a person who does not work at the site, but has a personal relationship with an employee. When viewed in this way, we expect that almost all workplaces would qualify as “open to the public,” not just simply retail stores, banks, and other establishments that invite public access, which might come as a surprise to some.
Catherine Skulan: That’s right—that’s really something to think about. Are there any other thorny issues that you’re seeing employers have to contend with in connection with this new law?
Patrick Maher: Employers are required to provide effective procedures to obtain the active involvement of employees in developing, implementing, and maintaining their plans, so, some employers think about how they can secure active participation. We would suggest that employee surveys can accomplish this goal and help employers identify and correct hazards in the workplace. They could also provide time for employee input during required trainings upon implementation and annually thereafter.
Catherine Skulan: What are the penalties for noncompliance?
Patrick Maher: Non-compliance with the Act can result in significant penalties, including fines starting at $18,000 and rising as high as $25,000 for serious violations and around $158,000 for willful violations. That’s something that asset managers in California need to think about for their own offices, as do managers with portfolio companies in California when considering the compliance requirements those PortCos have with respect to local law.
Catherine Skulan: That’s all the time we have today. We’ve covered important developments under two areas of California employment law, and I hope our listeners have found this helpful. For our listeners, please visit www.ropesgray.com for additional news and commentary about other important asset management developments as they arise. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including on Apple and Spotify. If you’d like to learn more about any of the topics we discussed today, or if we can help you to navigate any of the laws discussed today in a more tailored way, please do not hesitate to contact us. Thanks again for joining.