Business Law

CEB Selected Developments in Business Law

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the January 2025 update to Organizing Corporations in California. References are to the book’s section numbers. Legal developments covered include developments in such important practice areas as non-compete and arbitration agreements, and the Corporate Transparency Act (CTA). Read More.

Please note that due to CEB’s publication schedule, the recent Texas case enjoining enforcement of the CTA nationwide was not included in the January 2025 update to Organizing Corporations in California. However, this development is included in the February 2025 update of Advising California Partnerships, and a relevant section of that text is reproduced here:

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction halting the government’s enforcement of the CTA nationwide. Texas Top Cop Shop, Inc. v Garland (ED Tex, Dec. 3, 2024, No. 4:24–CV–478) 2024 US Dist. Lexis 218294. The court determined plaintiffs met their burden to show substantial likelihood of success on the merits of their US Const amend X challenge that the CTA is outside Congress’s power. This injunction is not limited to where the court sits or to specific plaintiffs in this case, but extends across the nation. Until the district court’s preliminary injunction is lifted, it effectively stays the CTA’s January 1, 2025, reporting deadline.   

The government appealed the district court’s decision. Soon after, separate panels of the Fifth Circuit Court of Appeals granted (December 23) and then vacated (December 26) a stay of the district court’s injunction. Texas Top Cop Shop, Inc. v Garland (5th Cir., Dec. 26, 2024, No. 24-40792) 2024 US App Lexis 32702. As a result, reporting companies are currently not required to file beneficial ownership information reports with FinCEN.

 The government’s appeal will now be heard by a Fifth Circuit panel to determine whether the plaintiffs’ constitutional claims against the CTA are likely to succeed on the merits. At the same time, federal appellate courts in the Fourth, Ninth, and Eleventh Circuits are considering similar issues. (Community Ass’n Inst. v. Yellen (E.D. Va., Oct. 24, 2024, No. 1:24–cv–1597); Firestone v. Yellen (D.Or., Sept. 20, 2024, No. 3:24–cv–1034–SI); Nat. Small Business United v. U.S. Dept. of the Treas. (11th Cir., Mar. 11, 2024, No. 24–10736).)[1]

Selected Developments in Business Law — Organizing Corporations in California

Non-Compete Agreements

California has taken a strong stance against non-compete agreements, significantly limiting their enforceability. Recent legislation amends Bus & P C §16600 to add Bus & P C §§16600.1, 16600.5, effective January 1, 2024. Employers must now navigate complex compliance requirements, including strict notice periods and adherence to specific exemptions.

Arbitration Agreements

The legal landscape for arbitration agreements in California has shifted. Arbitration is no longer the favored forum for resolving disputes, and courts are increasingly scrutinizing the enforceability of these agreements, particularly regarding issues such as timely fee payments and the burden of proof for agreement authenticity. Businesses should carefully review and update their arbitration agreements to mitigate potential risks.

Recent Case Law

  • DraftKings Inc. v Hermalyn (1st Cir, Sep. 26, 2024, No. 24-1443) 2024 US App Lexis 24472. This was a test case for Section 16600.5’s application for contracts signed and employment maintained outside of California. The first circuit court of appeals affirmed the district court’s decision to enforce a Massachusetts corporation’s non-compete agreement against its former employee, even after the employee relocated to live and work in California. The employee argued, unsuccessfully, that Bus & P C §16600.5 invalidated his former employer’s non-compete agreement “regardless of whether the contract was signed and the employment was maintained outside of California.” The court of appeals held that in this instance Massachusetts law, which generally favors non-compete agreements, applied instead of California law, which would have voided the agreement under §16600.5. It reasoned that Massachusetts law applied because the employee failed to show that his new state of residence had a “materially greater interest” in the matter than his former state of residence. The court distinguished the facts in this case from a similar case where a remote worker, based in California, left his Massachusetts employer for a California employer, noting in dicta that if the former employee’s work was performed in California then the state of California would have a materially greater interest than Massachusetts in the application of its state law to the non-compete agreement.
  • Quach v. California Commerce Club, Inc. (2024) 16 Cal.5th 562. For decades the courts have interpreted the FAA as favoring arbitration over litigation. The U.S. Supreme Court’s decision in Morgan v. Sundance, Inc. (2022) 596 U.S. 411 prompted  California to review and ultimately end its policy of favoring arbitration.
  • Keeton v Tesla, Inc. (2024) 103 CA5th 26.  In Keeton, the district court held that the California Arbitration Act (CAA) (CCP §§1280–1294.2), establishes a bright-line rule that the simple failure to pay fees or costs within 30 days after the due date results in a material breach of the arbitration agreement.  Pursuant to CCP §1281.98, Tesla materially breached the arbitration agreement by failing to pay its arbitration fees within 30 days of the due date. Although the payment was only a few days late, the district court lifted the stay and imposed a $1,000 monetary sanction on Tesla under CCP § 1281.99. The court of appeal affirmed. See §7.50.
  • Garcia v. Stoneledge Furniture LLC (2024)102 Cal.App.5th 41. In California, the party seeking to compel arbitration has the ultimate burden of proving, by a preponderance of the evidence, the authenticity of the signatures on an arbitration agreement. Employers’ use of electronic signing and onboarding processes should be mapped out accordingly. In Garcia, an employer could not prove, by preponderance of the evidence, that it had formed an agreement to arbitrate disputes with its employee who allegedly signed and acknowledged her arbitration agreement online. But the employee denied having signed the arbitration agreement, and the onboarding process described by the employer left open the possibility that someone other than the employee affixed her digital signature to the document.
  • Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478; Heckman v Live Nation Entertainment, Inc. (9th Cir, Oct. 28, 2024 No. 26-55770). A pair of decisions from the California Supreme Court and the Ninth Circuit Court of Appeals, which emphasizes that California companies with custom arbitration agreements should carefully review them to ensure that they’re enforceable.

National Developments

Delaware has recently expanded the scope of permissible delegations of authority in stockholder agreements. While this development is significant for Delaware corporations, California and Nevada have not yet adopted similar legislation. In West Palm Beach Firefighters’ Pension Fund v Moelis & Co. (Del Ch 2024) 311 A3d 809, the Delaware chancery court invalidated a stockholder agreement between the corporation and its founder on the grounds that it impermissibly delegated authority of the board of directors to the stockholder. The court noted that if the delegation of authority was included in the corporation’s certificate of incorporation, then it would have been permissible. In response to the court’s decision in Moelis, the Delaware legislature enacted 8 Del Code Ann §122(18) to specifically allow for broad delegation of decision-making authority to current or prospective stockholders in a stockholder agreement regardless of whether the corporation’s certificate of incorporation allows for such delegation. There is no similar law in California or Nevada law to 8 Del Code Ann §122(18).

Conclusion:

The legal landscape in California has evolved significantly in 2024, particularly in the areas of non-compete agreements and arbitration. Businesses operating in California must stay informed about these developments and consult with legal counsel to ensure compliance with the latest developments.


[1] The constitutionality of the Corporate Transparency Act was called into question by National Small Bus. United v Yellen (ND Ala, March 1, 2024, No. 5:22-cv-01448) 2024 US Dist. Lexis 36205. On March 1, 2024, the district court permanently enjoined the government from enforcing the CTA against the plaintiffs. The court’s final declaratory judgment held that the CTA is unconstitutional because it exceeds Congress’ Constitutional power. The government filed an appeal in the Eleventh Circuit on March 11, 2024.


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