MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
From: Renata Vasquez (Partner, CA Bar No. 247503), Devon Archer (Senior Associate, CA Bar No. 318274), and Nadia Petrov (Associate, CA Bar No. 342891) — Labor & Employment Practice Group, Calderwood & Harkness LLP
To: Camille Desrosiers, General Counsel & Vice President of Legal, Lumos Analytics Inc.
Date: April 8, 2024
Re: California Enforceability Analysis — Non-Compete, Non-Solicitation, Invention-Assignment, and Related Restrictive Covenant Provisions in Lumos Analytics Inc. Employment Agreements
Matter No.: 1008-00006
Reference: EL-2024-0847-RV
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") was retained by Lumos Analytics Inc. ("Lumos" or the "Company") to conduct a comprehensive California-specific review and enforceability analysis of the confidentiality, invention-assignment, and restrictive covenant provisions contained in Lumos's existing employment-related agreements for its one hundred forty-two (142) California-based employees. This memorandum presents the Firm's findings, risk assessments, and recommendations.
This engagement arises in the context of Lumos's February 14, 2024 Series C financing, in which the Company raised $68 million at a $410 million post-money valuation, led by Ridgeline Ventures Fund IV, L.P. During the course of post-closing integration and oversight, Priya Narayanan, a Principal at Ridgeline Ventures Management LLC serving as board observer at Lumos, identified what she characterized as material compliance gaps in the Company's existing employment agreements. These concerns were detailed in her February 28, 2024 board observer report circulated to the Lumos Board of Directors. The board observer report specifically flagged the potential exposure arising from California's recently enacted SB 699 and AB 1076, as well as deficiencies in the Company's invention-assignment framework.
The template agreements currently in use — including the Company's standard Proprietary Information & Inventions Agreement ("PIIA") and related offer letter and employment agreement provisions — were last updated in the second quarter of 2021 by Whitmore & Cheng LLP, the Company's general outside corporate counsel. Those agreements were drafted prior to the enactment of SB 699 and AB 1076, both of which became effective on January 1, 2024, and they reflect an approach to restrictive covenants that was already problematic under California law at the time of their drafting.
Our scope of review encompasses the analysis of provisions applicable across four distinct employee tiers: Executive (11 employees), Senior Engineer/Data Scientist (38 employees), Mid-Level (54 employees), and Entry-Level (39 employees), representing the full complement of 142 California-based employees out of the Company's 187 total full-time equivalents ("FTEs").
Summary of Critical Findings. Our analysis has identified six areas of concern, two of which we classify as posing critical legal risk requiring immediate remedial action:
(1) Non-Compete Clause — Critical Risk. The twelve-month global post-employment non-compete clause contained in the existing agreements is void and unenforceable under California Business & Professions Code Section 16600. More significantly, the continued maintenance of this void provision in executed agreements now exposes Lumos to affirmative liability under SB 699 (codified at Section 16600.5 of the Business & Professions Code) and AB 1076 (codified at Labor Code Section 432.5), both of which became effective on January 1, 2024. The AB 1076 mandatory notification deadline of February 14, 2024 has already passed without Lumos having issued the required individualized written notifications to current and qualifying former employees, constituting a current and ongoing compliance deficiency.
(2) Non-Solicitation Clause — Moderate Risk. The eighteen-month employee and customer non-solicitation clause is likely unenforceable under current California precedent, particularly in light of the California Court of Appeal's decision in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2020) 28 Cal.App.5th 923 and the continued trend of California courts treating broad non-solicitation provisions as restraints on trade falling within the prohibition of Section 16600.
(3) Invention-Assignment Provision — Critical Risk. The invention-assignment provision is overbroad in scope and, critically, omits the mandatory statutory notice required by California Labor Code Section 2872, which requires employers to provide employees with a written notification containing the text of Section 2870. This omission creates significant intellectual property ownership risk for a company that expended $18.4 million on research and development in fiscal year 2023, representing approximately 43.5% of the Company's $42.3 million in annual recurring revenue ("ARR") for the same period. Given the foundational importance of clear IP ownership to Lumos's $410 million post-money valuation, this deficiency warrants immediate remediation.
(4) Confidentiality Obligations — Moderate Risk. The indefinite confidentiality obligation in the existing agreements fails to distinguish between trade secrets — which may be protected in perpetuity — and general confidential information, which should be subject to a reasonable time limitation. The current approach risks a court finding the confidentiality obligation to be an unreasonable restraint under Section 16600.
(5) DTSA Whistleblower Immunity Notice — Low-Moderate Risk. The agreements omit the whistleblower immunity notice required by 18 U.S.C. § 1833(b) of the Defend Trade Secrets Act ("DTSA"). While this omission does not invalidate the agreements, it limits Lumos's ability to recover exemplary damages and attorneys' fees in any future DTSA action against an employee.
(6) Choice of Law and Forum Selection — Moderate Risk. The Delaware choice-of-law provision and Delaware forum-selection clause are inappropriate for agreements with California-based employees and are voidable under California Labor Code Section 925.
Recommendation. We recommend the immediate redrafting and re-execution of all employment agreements for the Company's 142 California-based employees across all four tiers, with priority given to (a) the elimination of void restrictive covenant provisions to mitigate SB 699 and AB 1076 exposure, (b) the issuance of corrective AB 1076 notifications as soon as practicable, and (c) the restructuring of invention-assignment provisions to ensure compliance with Sections 2870 through 2872 and to protect the Company's IP portfolio. Each of these findings and recommendations is discussed in detail below.
II. BACKGROUND AND ENGAGEMENT CONTEXT
A. Company Overview
Lumos Analytics Inc. is a Delaware-incorporated, California-headquartered software-as-a-service ("SaaS") and financial technology ("fintech") company that delivers artificial intelligence and machine learning ("AI/ML") based predictive analytics and fraud-detection solutions to mid-market financial institutions, including community banks, credit unions, and regional lending platforms. The Company was founded in 2019 and maintains its principal place of business at 2200 Pacific Avenue, Suite 1400, San Francisco, California 94115.
Lumos is registered as a Delaware corporation under entity file number 7482619, is registered to do business in California under Secretary of State entity number C4518230, and holds Employer Identification Number 84-3291067. The Company's co-founders are Amir Johal (Chief Executive Officer) and Dr. Mei-Lin Zhao (Chief Technology Officer), both of whom reside in San Francisco.
As of the date of this memorandum, Lumos employs a total of one hundred eighty-seven (187) full-time employees. Of these, one hundred forty-two (142) are based in California, twenty-seven (27) are based in New York, and eighteen (18) are distributed across other states. The California-based workforce is concentrated in San Francisco, with a small number of employees working remotely from other California locations.
The Company's fiscal year 2023 financial metrics include annual recurring revenue of $42,300,000 (the "FY 2023 ARR"), research and development expenditures of $18,400,000 (representing approximately 43.5% of FY 2023 ARR, calculated as $18.4 million divided by $42.3 million), and California payroll expenditures of approximately $25,800,000. The substantial R&D spend reflects Lumos's core business strategy of continuous development of proprietary machine-learning models, algorithms, and data-processing systems for financial fraud detection and predictive analytics.
B. Series C Financing and Investor Concerns
On February 14, 2024, Lumos completed its Series C preferred stock financing, raising $68,000,000 at a post-money valuation of $410,000,000. The financing round was led by Ridgeline Ventures Fund IV, L.P. ("Ridgeline"), a Delaware limited partnership managed by Ridgeline Ventures Management LLC, with offices in Menlo Park, California. As lead investor, Ridgeline acquired approximately 16.59% of the Company's fully diluted equity (calculated as $68 million divided by $410 million, yielding approximately 16.59%).
As part of the Series C transaction documents, Ridgeline was granted the right to designate a board observer. Priya Narayanan, a Principal at Ridgeline Ventures Management LLC, was designated as Ridgeline's board observer at Lumos. In her February 28, 2024 board observer report — the first such report following the close of the Series C — Ms. Narayanan identified what she characterized as material compliance gaps in Lumos's existing employment agreements, with particular emphasis on the following concerns:
(a) The continued presence of a twelve-month non-compete clause in executed agreements with California employees, which Ms. Narayanan flagged as creating exposure under SB 699 and AB 1076 following their January 1, 2024 effective date;
(b) The absence of California Labor Code Section 2870 statutory notices in the Company's invention-assignment agreements, which Ms. Narayanan noted could create uncertainty regarding IP ownership — a matter of significant concern to Ridgeline given its $68 million investment and the centrality of Lumos's proprietary technology to the Company's valuation; and
(c) The use of Delaware choice-of-law provisions in agreements with California-based employees, which Ms. Narayanan identified as potentially voidable under California Labor Code Section 925.
Following receipt and review of Ms. Narayanan's board observer report, Camille Desrosiers, Lumos's General Counsel and Vice President of Legal, contacted Renata Vasquez at Calderwood & Harkness on March 7, 2024 to discuss the engagement of the Firm for a comprehensive review and remediation project. Calderwood & Harkness's engagement letter was delivered on March 12, 2024, and following completion of the Firm's conflicts clearance process, the engagement was formally opened on March 19, 2024 under Matter Number 1008-00006, with Engagement Letter Reference EL-2024-0847-RV.
C. Existing Agreements Under Review
The existing template Proprietary Information & Inventions Agreement ("PIIA") and related employment and offer letter provisions were last updated in the second quarter of 2021 by Whitmore & Cheng LLP, a San Francisco-based corporate and transactional law firm that has served as Lumos's general outside corporate counsel since the Company's incorporation. The 2021 revisions were supervised by Partner Leland Tsao of Whitmore & Cheng. Based on our review, the 2021 revisions appear to have been primarily focused on conforming the PIIA to changes in the Company's equity compensation structure in connection with the adoption of the Lumos Analytics Inc. 2020 Equity Incentive Plan, and did not undertake a comprehensive California employment law compliance review.
The existing agreements and a complete employee roster were provided to Calderwood & Harkness via Lumos's SecureShare document portal (portal ID: LSA-0847) on March 25, 2024. The document production included one hundred forty-two (142) executed PIIAs (one for each California-based employee), corresponding offer letters for all employees hired after January 1, 2020, and a complete roster identifying each employee's name, title, tier designation, start date, base salary, equity grant, and work location.
This memorandum addresses the enforceability of the existing provisions under California law as applicable to all 142 California-based employees. We have not separately analyzed the enforceability of the provisions as applied to Lumos's 27 New York-based employees or 18 employees in other states, each of whom may be subject to different legal regimes. That analysis, if desired, would be the subject of a separate engagement.
D. California Employee Tiers
Lumos's 142 California-based employees are organized into four tiers, each with distinct compensation structures, access levels, and functional responsibilities. The table below summarizes the composition of each tier:
All equity grants referenced above were issued under the Lumos Analytics Inc. 2020 Equity Incentive Plan, as amended (the "Plan"). The equity ranges reflect fully diluted percentages based on the current capitalization table as of the date of the Series C closing. The tier designations are based on Lumos's internal Human Resources classification system as reflected in the employee roster provided on March 25, 2024. While the tier structure is useful for purposes of tailoring the revised agreements and assessing the practical impact of each deficiency, it bears emphasis that the legal requirements discussed in this memorandum — including the prohibitions of Section 16600, the notification requirements of AB 1076, and the Section 2870 notice mandate — apply equally to all employees regardless of tier, compensation level, or seniority.
III. APPLICABLE LEGAL FRAMEWORK
This section sets forth the principal legal authorities that govern the enforceability of the provisions at issue. Understanding this framework is essential to the provision-by-provision analysis that follows in Section IV.
A. California Business & Professions Code § 16600 — Non-Compete Prohibition
California Business and Professions Code Section 16600 provides, in pertinent part:
"Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."
Section 16600 reflects California's strong and long-standing public policy in favor of open competition and employee mobility. California's approach is among the broadest non-compete prohibitions in the United States, standing in marked contrast to the majority of states, which permit non-compete agreements subject to a "reasonableness" analysis that considers factors such as the duration, geographic scope, and breadth of the restriction.
The statutory exceptions to Section 16600 are narrow and enumerated. Section 16601 permits non-compete agreements entered into in connection with the sale of the goodwill of a business or of all of the owner's interest in a business. Section 16602 permits non-compete agreements in connection with the dissolution of, or dissociation from, a partnership. Section 16602.5 permits non-compete agreements in connection with the dissolution of, or dissociation from, a limited liability company. None of these exceptions is applicable to Lumos's employment agreements.
The seminal decision interpreting Section 16600 in the employment context is Edwards v. Kraft Quill CPAs LLP (2008) 44 Cal.4th 937. In Edwards, the California Supreme Court unequivocally confirmed the breadth of Section 16600's prohibition, expressly rejecting the argument that the statute should be interpreted to permit "narrow" or "reasonable" restraints on competition. The Court held that Section 16600 means what it says: any restraint on engaging in a lawful profession, trade, or business is void, regardless of how narrow or reasonable the restraint may appear. The Court specifically rejected the Ninth Circuit's application of a "narrow restraint" exception in Campbell v. Trustees of Leland Stanford Jr. University (9th Cir. 1987) 817 F.2d 499, which had introduced a limited reasonableness analysis into California non-compete law. After Edwards, the law is clear: California does not apply a reasonableness test to non-compete agreements in the employment context.
This bright-line rule renders the analysis straightforward: a post-employment non-compete clause in an employment agreement with a California employee is void on its face, regardless of its duration, geographic scope, or the reasonableness of its terms. The inquiry is not whether the specific restriction is reasonable, but whether the provision restrains the employee from engaging in a lawful profession, trade, or business. If it does, it is void.
B. SB 699 — Cal. Bus. & Prof. Code § 16600.5 (Effective January 1, 2024)
Senate Bill 699, codified at California Business and Professions Code Section 16600.5, became effective on January 1, 2024. This statute significantly expands the enforcement framework around Section 16600 in several important respects.
First, Section 16600.5 prohibits any employer from entering into or attempting to enforce a noncompete agreement, regardless of where and when the contract was signed. This provision is significant because it extends California's non-compete prohibition extraterritorially. Prior to SB 699, there was uncertainty about whether Section 16600 applied to contracts signed in other states or governed by the law of other states. Section 16600.5 resolves that uncertainty by making the prohibition applicable to all contracts affecting California employees, regardless of the contract's formation jurisdiction or choice-of-law provision.
Second, Section 16600.5 expressly declares void any noncompete clause that does not satisfy a statutory exception under Sections 16601, 16602, or 16602.5.
Third, Section 16600.5 creates an affirmative obligation: an employer "shall not enter into or attempt to enforce a contract that is void" under Section 16600 or the chapter. This language is significant because it transforms the non-compete prohibition from a passive defense (the clause is void and unenforceable if challenged) into an active duty (the employer must not maintain or attempt to enforce the clause). The mere presence of a void non-compete clause in an executed agreement, without any affirmative attempt at enforcement, may itself constitute a violation of Section 16600.5 — a question that has not yet been definitively resolved by the courts but that creates meaningful risk.
Fourth, and of particular importance to Lumos, Section 16600.5 creates a private right of action for aggrieved employees. An employee who is subject to a void noncompete provision may bring an action for injunctive relief and may recover actual damages and attorneys' fees. This represents a significant enhancement of employee remedies, as prior to SB 699, the primary remedy was declaratory relief establishing that the provision was void.
For Lumos, the significance of SB 699 is direct and immediate. The existing twelve-month non-compete provisions remain in executed agreements with all 142 California employees. Under the pre-SB 699 framework, Lumos's practical risk was limited, as the provisions were void and unenforceable but carried no affirmative penalty. Under SB 699, the continued maintenance of these void provisions in executed agreements exposes Lumos to potential claims by any of its California employees for injunctive relief, actual damages, and attorneys' fees. The statute creates an affirmative obligation to refrain from maintaining void provisions, and mere non-enforcement is likely insufficient to satisfy this obligation.
C. AB 1076 — Cal. Labor Code § 432.5 (Effective January 1, 2024)
Assembly Bill 1076, codified at California Labor Code Section 432.5, also became effective on January 1, 2024. This statute complements SB 699 by adding a Labor Code prohibition and a notification requirement.
Section 432.5 prohibits an employer from including a noncompete clause in an employment contract or requiring an employee to enter into a noncompete agreement where the clause or agreement does not satisfy an exception under Business and Professions Code Sections 16600 through 16602.5. This prohibition is substantively overlapping with Section 16600.5 but is codified in the Labor Code, thereby subjecting violations to the Labor Code's enforcement mechanisms, including civil penalties that may be sought by the Labor Commissioner.
Critically, AB 1076 includes a retrospective notification requirement. Employers who had existing noncompete agreements with current employees as of January 1, 2024 were required to provide individualized written notification to those employees that the noncompete provisions are void. This notification was required to be sent by February 14, 2024. The notification requirement extends not only to current employees but also to former employees who were employed after January 1, 2022.
Lumos's Compliance Status. Based on our review and discussions with Ms. Desrosiers, Lumos did not send the required AB 1076 notifications by the February 14, 2024 deadline. This constitutes a current compliance deficiency. The failure to timely notify exposes Lumos to potential civil penalties by the Labor Commissioner and to private actions by employees for injunctive relief. As discussed in Section VII below, we recommend that Lumos send corrective notifications as soon as practicable, even though the statutory deadline has passed, to demonstrate good-faith compliance and mitigate its exposure.
D. California Labor Code §§ 2870–2872 — Employee Invention Protections
California Labor Code Sections 2870 through 2872 establish important limitations on the scope of permissible invention-assignment agreements between employers and employees.
Section 2870 provides that any provision in an employment agreement that requires an employee to assign rights to an invention is unenforceable to the extent it applies to an invention that the employee developed entirely on the employee's own time without using the employer's equipment, supplies, facilities, or trade secret information, unless the invention relates at the time of conception or reduction to practice to (a) the employer's business, or (b) the employer's actual or demonstrably anticipated research or development. In essence, Section 2870 creates a statutory safe harbor for employee inventions that are conceived on the employee's own time, without company resources, and that do not relate to the employer's business or R&D activities. This safe harbor is non-waivable; an employer cannot contract around it.
Section 2871 provides that no employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Any such provision is to that extent against the public policy of California and is unenforceable.
Section 2872 establishes the mandatory notice requirement that is central to one of our critical findings in this memorandum. Section 2872 provides that, if an employment agreement contains a provision requiring the employee to assign or offer to assign any rights in any invention to the employer, the employer must, at the time the agreement is made, provide a written notification to the employee setting forth the provisions of Section 2870. This is commonly referred to as the "Section 2870 notice" or "Section 2872 notice." The notice is typically included as an exhibit to the PIIA.
The consequence of non-compliance with Sections 2870 through 2872 is that the overbroad assignment clause may be unenforceable as to inventions falling within the Section 2870 safe harbor. More broadly, the absence of the required notice creates an environment of uncertainty regarding the scope of the employer's IP rights, potentially giving rise to disputes about the ownership of inventions that the employer believes it owns. For a technology company such as Lumos, where the value of the enterprise is substantially derived from its proprietary technology, this uncertainty is a material business risk.
E. California Civil Code § 3426 et seq. — California Uniform Trade Secrets Act (CUTSA)
The California Uniform Trade Secrets Act ("CUTSA"), codified at California Civil Code Section 3426 et seq., provides the statutory framework for the protection of trade secrets in California. CUTSA defines a "trade secret" as information, including a formula, pattern, compilation, program, device, method, technique, or process, that (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Cal. Civ. Code § 3426.1(d).
CUTSA provides civil remedies for misappropriation of trade secrets, including injunctive relief, damages (including both actual loss and unjust enrichment), and, in cases of willful and malicious misappropriation, exemplary damages not exceeding twice the amount of the compensatory award. The statute also provides for an award of attorneys' fees to the prevailing party in cases of bad faith or willful and malicious misappropriation.
Of particular relevance to the confidentiality provision analysis in Section IV.D below, CUTSA has a broad preemptive effect. Section 3426.7 provides that CUTSA "does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret" or "(2) other civil remedies that are not based upon misappropriation of a trade secret." California courts have interpreted this provision as preempting tort claims — such as unfair competition, conversion, and breach of confidence — that are based on the same nucleus of facts as a trade secret misappropriation claim. This preemptive scope is relevant to the structuring of confidentiality provisions, as provisions that attempt to protect non-trade-secret information through mechanisms that effectively create trade-secret-like protections may be subject to challenge.
Additionally, the CUTSA framework is significant because trade secrets may be protected indefinitely — so long as the information retains its status as a trade secret. This principle supports the bifurcation approach recommended in Section IV.D, under which trade secrets receive indefinite protection while other confidential information is subject to a time-limited obligation.
F. Defend Trade Secrets Act — 18 U.S.C. § 1836; Whistleblower Immunity Notice — 18 U.S.C. § 1833(b)
The federal Defend Trade Secrets Act ("DTSA"), enacted in 2016 and codified at 18 U.S.C. § 1836, provides a private federal cause of action for trade secret misappropriation, supplementing the remedies available under state law (including CUTSA). The DTSA allows trade secret owners to bring civil actions in federal court and provides remedies including injunctive relief, damages, and, in cases of willful and malicious misappropriation, exemplary damages up to twice the compensatory award plus reasonable attorneys' fees.
Section 1833(b) of the DTSA establishes an immunity provision for whistleblowers. Specifically, 18 U.S.C. § 1833(b)(1) provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (A) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or (B) in a complaint or other document filed under seal in a lawsuit or other proceeding. Section 1833(b)(2) extends this immunity to disclosures made by an individual in an anti-retaliation lawsuit, provided the individual files the trade secret information under seal and does not disclose it except pursuant to court order.
Section 1833(b)(3)(A) imposes a notice requirement on employers. It provides that an employer must provide notice of the immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. The employer may satisfy this requirement either by including the notice directly in the agreement or by providing a cross-reference to a policy document that sets forth the employer's reporting policy and the immunity provisions. If the employer fails to comply with this notice requirement, the employer may not recover exemplary (punitive) damages or attorneys' fees against the employee in a DTSA action. The omission does not void the agreement or eliminate other DTSA remedies; it only limits the enhanced remedies of exemplary damages and attorneys' fees.
G. California Choice-of-Law Principles
California courts apply California's governmental interest analysis to choice-of-law questions. Under this approach, the court first determines whether the relevant laws of the interested states differ. If they do, the court examines each state's interest in having its law applied by looking to the policies underlying the respective laws. If only one state has a legitimate interest, its law is applied. If both states have legitimate interests, the court applies the law of the state whose interests would be more impaired if its law were not applied, taking into account the comparative impairment of the interests of each state.
In the employment context, California courts have consistently held that California has a strong interest in applying its employment laws to employment relationships where the employee primarily works in California. This interest is particularly pronounced with respect to the non-compete prohibition of Section 16600, which reflects a fundamental public policy of the state. Even where a contract contains a choice-of-law provision designating the law of another state, California courts will generally refuse to apply that law if doing so would result in the application of a rule that contravenes California's fundamental public policy. The Restatement (Second) of Conflict of Laws § 187, which California courts also consider, similarly provides that the law of the chosen state will not be applied if the chosen law is contrary to a fundamental policy of the state with a materially greater interest in the issue.
Moreover, California Labor Code Section 925, which became effective on January 1, 2017, provides a statutory overlay to the common-law choice-of-law analysis. Section 925 provides that an employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) require the employee to adjudicate outside of California a claim arising in California; or (2) deprive the employee of the substantive protection of California law with respect to a controversy arising in California. Any such provision in an employment agreement is voidable by the employee, and if such a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.
Section 925 contains a limited exception: it does not apply to an employee who is individually represented by legal counsel in negotiating the terms of an agreement that includes a choice-of-law or forum-selection provision. As a practical matter, this exception will apply to few, if any, of Lumos's employees, as the existing agreements are template-based and were not individually negotiated.
The implication for Lumos is clear: the Delaware choice-of-law and forum-selection provisions in the existing agreements are voidable under Section 925 and are unlikely to be effective even in the absence of Section 925, given the governmental interest analysis. A California court considering the enforceability of the restrictive covenant provisions would almost certainly apply California law, rendering the Delaware choice-of-law provision a nullity in practice while simultaneously creating a compliance violation under Section 925.
IV. ANALYSIS
This section presents our provision-by-provision analysis of the six areas of concern identified in the Executive Summary. For each provision, we describe the existing language, analyze its enforceability under the legal framework set forth in Section III, assess the risk to Lumos, and provide specific recommendations.
A. Non-Compete Clause (Critical Risk — Immediate Action Required)
1. Description of Existing Provision. The existing PIIA and employment agreements contain a post-employment non-compete clause that is substantially identical across all four employee tiers. The clause imposes a twelve-month restriction on competitive activity following the termination of the employee's employment with Lumos, regardless of the reason for termination. The restriction applies globally — there is no geographic limitation.
Specifically, the clause prohibits the employee from, directly or indirectly, engaging in, being employed by, consulting with, or providing services to any person, firm, corporation, or other entity that competes with or is engaged in the same or a substantially similar business as Lumos's business, during the twelve-month period following separation. The clause does not define "competes with" or "substantially similar business" and does not narrow the restriction to specific competitive activities, product lines, or customer segments. It applies uniformly to all employee tiers, from entry-level associates to C-suite executives.
The clause further provides that the restriction applies to competitive activity anywhere in the world, reflecting what appears to have been a drafting choice to encompass Lumos's aspirations for global market penetration. The clause does not include any consideration or compensation for the restriction period (i.e., there is no "garden leave" provision or post-employment compensation tied to the non-compete obligation).
2. Enforceability Analysis. The non-compete clause is void and unenforceable as to all 142 California-based employees under California Business and Professions Code Section 16600. The analysis is straightforward and does not present a close question.
Section 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The existing non-compete clause directly restrains each Lumos employee from engaging in a lawful profession — namely, employment or consulting in the field of data analytics, artificial intelligence, machine learning, or financial technology — for a period of twelve months following separation. This restraint falls squarely within the prohibition of Section 16600.
None of the narrow statutory exceptions apply. The business-sale exception of Section 16601 is limited to non-compete agreements entered into in connection with the sale of the goodwill of a business or of all of the seller's ownership interest. The partnership exception of Section 16602 applies to non-compete agreements in connection with the dissolution of or dissociation from a partnership. The LLC exception of Section 16602.5 applies to non-compete agreements in connection with the dissolution of or dissociation from an LLC. Lumos's employment agreements are none of these; they are agreements between an employer and its at-will employees.
Under Edwards v. Kraft Quill CPAs LLP, the California Supreme Court has definitively rejected the argument that Section 16600 should be interpreted to permit "narrow" or "reasonable" restraints. The Court expressly held that Section 16600's prohibition is not subject to a reasonableness test. Accordingly, it is irrelevant that the restriction period is limited to twelve months, that the restriction might be considered "reasonable" in other jurisdictions, or that the restriction might be tailored to specific competitive activities. Under California law, the clause is void on its face.
The clause has been void since inception for all California-based employees. This is not a change effected by SB 699 or AB 1076 — it has been the law in California since Edwards was decided in 2008, and arguably since the enactment of Section 16600 in 1941. What SB 699 and AB 1076 have changed is the consequence of maintaining void non-compete provisions in executed agreements, as discussed below.
3. SB 699 / AB 1076 Exposure. Prior to January 1, 2024, the practical consequence of a void non-compete clause in a California employment agreement was limited: the clause was unenforceable, and an employee could seek declaratory relief to have the clause declared void, but the employer faced no affirmative penalty for having included the clause in the agreement (other than potential exposure to claims under California's unfair competition law, Business and Professions Code Section 17200). The 2024 enactment of SB 699 and AB 1076 has fundamentally changed this calculus.
SB 699 (Section 16600.5). Under SB 699, Lumos is now affirmatively prohibited from maintaining the non-compete language in existing agreements. The statute provides that an employer "shall not enter into or attempt to enforce a contract that is void" under Section 16600. While the meaning of "attempt to enforce" is subject to interpretation, the broader language — "enter into" — may encompass the continued maintenance of void provisions in executed agreements, particularly where the employer has not taken affirmative steps to notify employees that the provisions are void.
SB 699 creates a private right of action. An employee or former employee who is aggrieved by a violation of Section 16600.5 may bring a civil action for injunctive relief, actual damages, and reasonable attorneys' fees and costs. The availability of attorneys' fees is particularly significant, as it creates a financial incentive for plaintiff-side employment attorneys to pursue claims on behalf of individual employees or classes of employees.
AB 1076 (Labor Code Section 432.5). Under AB 1076, Lumos was required to provide individualized written notification to each current employee and each former employee employed after January 1, 2022 that the non-compete provision in their agreement is void under Section 16600. This notification was required to have been sent by February 14, 2024.
Lumos did not send these notifications by the statutory deadline. This is a current, ongoing compliance deficiency. The failure to notify exposes Lumos to civil penalties that may be sought by the Labor Commissioner and to private actions by employees for injunctive relief. Employees may also argue that Lumos's failure to comply with the notification requirement — particularly after having been put on notice of the issue through Ms. Narayanan's board observer report — constitutes evidence of willful non-compliance, which could enhance damages or penalties in any enforcement action.
Risk Assessment. The failure to rescind the void non-compete clause and the failure to send the AB 1076 notification expose Lumos to potential claims by any of its 142 current California employees and by any California-based former employees who were employed after January 1, 2022. Based on the employee roster provided on March 25, 2024, we estimate that the population of qualifying former employees is approximately 23 to 28 individuals, though this number should be confirmed with Gerald Huang's records. The total exposed population is therefore approximately 165 to 170 individuals.
While we are not aware of any current or threatened claims, the risk is real and should not be minimized. The plaintiffs' employment bar in California has been active in pursuing SB 699 and AB 1076 claims since January 2024, and there have been reports of demand letters being sent to employers by employee-side counsel in similar circumstances. Given Lumos's profile as a well-funded technology company (particularly in light of the publicly reported Series C), it may be an attractive target for such claims.
4. Recommendation. We recommend the following immediate actions:
(a) Delete the non-compete clause. The twelve-month global post-employment non-compete clause should be immediately deleted from all template agreements. No form of post-employment non-compete restriction should appear in any agreement with a California employee.
(b) Send AB 1076 notifications. Lumos should send individualized written notifications to all current California employees and to all California-based former employees who were employed after January 1, 2022, notifying them that the non-compete provision in their existing agreement is void and unenforceable under California law. Although the statutory deadline has passed, sending corrective notifications promptly will demonstrate good-faith compliance and will mitigate Lumos's exposure in any future enforcement action or private claim. We discuss the content and logistics of these notifications in detail in Section VII below.
(c) Include SB 699-compliant language. The revised PIIA templates should include an affirmative statement that Lumos does not restrict employees from engaging in any lawful profession, trade, or business following the termination of their employment. This language serves a dual purpose: it demonstrates compliance with Section 16600.5 and it provides clarity to employees regarding their post-employment rights.
(d) Coordinate with Whitmore & Cheng LLP. To the extent that any corporate governance steps are required — such as board resolutions authorizing the amendment and re-execution of employment agreements — coordination with Leland Tsao at Whitmore & Cheng is recommended.
B. Non-Solicitation Clause (Moderate Risk — Significant Revision Required)
1. Description of Existing Provision. The existing agreements contain an eighteen-month post-employment non-solicitation clause that encompasses two distinct restrictions: (a) a prohibition on the solicitation of Lumos employees for purposes of inducing them to leave their employment with Lumos (the "employee non-solicitation" component), and (b) a prohibition on the solicitation of Lumos customers or prospective customers for purposes of diverting or attempting to divert their business from Lumos (the "customer non-solicitation" component).
The clause is broadly drafted. It prohibits the departing employee from "directly or indirectly" soliciting, inducing, recruiting, or encouraging any Lumos employee to terminate his or her employment with Lumos, and from "directly or indirectly" soliciting, contacting, or transacting business with any customer or prospective customer of Lumos for purposes of providing products or services competitive with those offered by Lumos. The clause defines "prospective customer" expansively to include any person or entity to which Lumos has made a proposal, presentation, or pitch within the twelve months preceding the employee's separation. The restriction applies for a period of eighteen months following the employee's last day of employment.
2. Employee Non-Solicitation. The enforceability of employee non-solicitation provisions under California law is an area of significant uncertainty and ongoing judicial development. California courts have not uniformly addressed the issue, and the trend of recent authority is toward heightened skepticism.
Historically, some California courts distinguished between non-compete agreements (which directly restrict a departing employee's ability to compete) and employee non-solicitation agreements (which restrict a departing employee's ability to recruit former colleagues). Under this view, a narrowly drawn employee non-solicitation provision was not a "restraint" on engaging in a lawful profession, trade, or business within the meaning of Section 16600, because it did not prevent the departing employee from working for a competitor — it merely limited the departing employee's ability to recruit from the former employer's workforce. This position found support in certain federal court decisions applying California law, including Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268.
However, the modern trend in California jurisprudence is to treat broad non-solicitation provisions as restraints on trade falling within the prohibition of Section 16600. The most significant recent decision is AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923, in which the California Court of Appeal held that a broad no-hire and no-solicitation provision that prevented a staffing company from soliciting or hiring the employees of a competing staffing company was an invalid restraint on trade under Section 16600. The AMN Healthcare court emphasized that the restriction had the practical effect of restraining competition by limiting the availability of workers in the labor market.
While AMN Healthcare involved a business-to-business context rather than an employer-employee relationship, its reasoning has been broadly interpreted by practitioners and lower courts as signaling a narrowing of the permissible scope of employee non-solicitation clauses in all contexts. The decision underscores the principle that any provision that has the practical effect of restraining competition — even if it does not directly prohibit the departing employee from engaging in a competing business — is suspect under Section 16600.
The existing eighteen-month duration of Lumos's employee non-solicitation clause is aggressive by any standard. The breadth of the restriction — encompassing both "direct" and "indirect" solicitation and covering all Lumos employees, regardless of their role or relationship to the departing employee — compounds the enforceability risk. Even under the more permissive historical view, this clause would face serious challenge. Under the post-AMN Healthcare trend, the clause is very likely unenforceable.
3. Customer Non-Solicitation. The enforceability of customer non-solicitation provisions under California law has evolved substantially in recent years, and the current weight of authority strongly disfavors such provisions.
California courts have increasingly treated customer non-solicitation clauses as restraints on trade void under Section 16600. The rationale is that a provision prohibiting a departing employee from soliciting or doing business with the former employer's customers is, in substance and effect, a restraint on the employee's ability to engage in a lawful business — because securing and servicing customers is a fundamental component of engaging in any business. A customer non-solicitation clause does not merely protect the employer's relationships; it directly limits the departing employee's ability to compete.
Post-AMN Healthcare, the consensus view among California employment practitioners is that customer non-solicitation clauses are essentially unenforceable in California. While there is no California Supreme Court decision squarely holding that customer non-solicitation clauses are per se void under Section 16600, the direction of the law is clear, and the risk of enforcement failure is high.
Moreover, even if a narrowly drawn customer non-solicitation provision could survive a Section 16600 challenge, the existing provision's eighteen-month duration and its expansive definition of "prospective customers" (encompassing entities to which Lumos has made any proposal, presentation, or pitch within the preceding twelve months) render the clause overbroad and highly vulnerable to challenge.
4. Recommendation. We recommend the following revisions to the non-solicitation provisions:
(a) Delete the customer non-solicitation clause entirely. For all California employees across all four tiers, the customer non-solicitation clause should be removed in its entirety. The clause is almost certainly unenforceable, and its continued inclusion in the agreements creates unnecessary risk without providing meaningful protection.
(b) Delete or substantially narrow the employee non-solicitation clause. Given the uncertain enforceability of employee non-solicitation provisions under current California law, the safest approach is to delete the employee non-solicitation clause entirely and to rely instead on robust confidentiality provisions and trade-secret protections to protect Lumos's competitive interests. Specifically, a well-drafted confidentiality provision will prevent departing employees from using or disclosing Lumos's proprietary employee information (such as compensation data, performance evaluations, and organizational strategies), thereby limiting the practical ability to engage in targeted solicitation.
If Lumos determines that it wishes to retain some form of employee non-solicitation provision notwithstanding the enforceability risk, the clause should be narrowed to prohibit only active, direct solicitation — i.e., personally initiating contact with a specific Lumos employee for purposes of recruiting that employee to a competing enterprise. The clause should expressly exclude "passive" conduct, such as responding to unsolicited inquiries, accepting applications submitted through general job postings, or engaging in general marketing or advertising of employment opportunities. The duration should be reduced from eighteen months to twelve months at most, though even this shortened duration may be insufficient to render the clause enforceable under current law. We emphasize that any retained employee non-solicitation provision carries meaningful enforceability risk in California, and we would not provide a high confidence opinion as to its enforceability.
(c) Ensure proper characterization. Any retained restrictions should be characterized as restrictive covenant provisions only to the extent permissible under California law, with appropriate savings clause language providing that provisions found to be unenforceable shall be severed without affecting the validity of the remainder of the agreement.
C. Invention-Assignment Provisions (Critical Risk — Fundamental Restructuring Required)
1. Description of Existing Provision. The existing invention-assignment clause in the PIIA requires each employee to irrevocably assign to Lumos all right, title, and interest in and to any "inventions, original works, developments, concepts, improvements, designs, discoveries, ideas, trademarks, or trade secrets" (collectively, "Inventions") that are conceived, developed, reduced to practice, or made by the employee, either solely or jointly with others, during the period of the employee's employment with Lumos.
The clause is notably broad in several respects. First, it does not limit the assignment obligation to inventions made using company resources, on company time, or during working hours. Second, it does not limit the assignment to inventions that relate to the employer's business or actual or demonstrably anticipated research and development activities. Third, the definition of "Inventions" is expansive, encompassing not only patentable inventions but also works of authorship, designs, concepts, improvements, discoveries, ideas, trademarks, and trade secrets — essentially capturing the full spectrum of intellectual property and creative output.
Additionally, the existing agreements suffer from two critical structural deficiencies:
(a) Missing Section 2870 Notice. The agreements do not include, either within the body of the PIIA or as an exhibit, the mandatory statutory notice required by California Labor Code Section 2872. Section 2872 requires that, at the time the agreement is made, the employer provide the employee with a written notification containing the provisions of Section 2870. The existing agreements contain no reference to Section 2870, no reproduction of its text, and no exhibit providing the required notice.
(b) Missing Prior-Invention Disclosure Schedule. The agreements do not include a prior-invention disclosure schedule (typically designated as "Exhibit A" to the PIIA). Without such a schedule, employees have no mechanism to identify and exclude pre-existing inventions, works of authorship, or other intellectual property that the employee developed prior to joining Lumos. The absence of this schedule increases the risk of ownership disputes, as Lumos may inadvertently claim ownership of pre-existing IP that the employee brings to the company, while the employee may lack documentation to prove prior development.
2. Legal Deficiencies. The existing invention-assignment provision is non-compliant with California law in several material respects.
Missing Section 2870 Notice. California Labor Code Section 2872 mandates that any employer requiring execution of an invention-assignment agreement must provide a written notification to the employee containing the text of Section 2870. This is a mandatory, non-waivable requirement. The purpose of the notice is to ensure that employees are informed of their statutory right to retain ownership of inventions that fall within the Section 2870 safe harbor — i.e., inventions developed entirely on the employee's own time, without use of employer resources, that do not relate to the employer's business or R&D activities.
The absence of the Section 2870 notice from Lumos's existing agreements is a clear and unambiguous compliance failure. Every one of the 142 executed PIIAs with California employees lacks this mandatory notice. While there is some debate among practitioners about the precise consequence of omitting the notice — whether it renders the entire assignment clause void or merely renders the clause unenforceable as to inventions falling within the Section 2870 safe harbor — the omission unquestionably creates legal vulnerability. At a minimum, it means that any invention claimed by Lumos that was developed by an employee on his or her own time, without company resources, could be the subject of a colorable ownership challenge if the employee can demonstrate that the invention does not relate to Lumos's business or R&D.
Overbroad Assignment Scope. The existing clause purports to assign to Lumos all inventions conceived or made during the period of employment, without limitation. This formulation sweeps in precisely the category of inventions that Section 2870 protects: inventions made entirely on the employee's own time, without company equipment or resources, and not related to the employer's business. The clause does not carve out Section 2870-qualifying inventions, and the absence of the Section 2870 notice compounds this deficiency.
Under California law, a clause that requires assignment of inventions falling within the Section 2870 safe harbor is unenforceable as to those inventions. Section 2871 expressly provides that no employer shall require such an assignment as a condition of employment or continued employment. The practical implication is that, for any dispute arising out of an invention developed by a Lumos employee that falls within the Section 2870 safe harbor, Lumos will face an uphill battle in establishing ownership — particularly given the absence of the required notice.
Missing Prior-Invention Disclosure. The absence of a prior-invention disclosure schedule creates a secondary but meaningful risk. Without a mechanism for employees to identify pre-existing inventions at the outset of employment, there is no clear record distinguishing between IP that the employee brought to Lumos and IP that was developed during employment. This ambiguity can give rise to disputes in multiple contexts: when an employee departs and claims ownership of certain technology, when Lumos seeks to enforce its IP rights against third parties, or when a prospective acquirer or future investor conducts diligence on Lumos's IP portfolio.
3. Significance for Lumos's Business. The deficiencies in Lumos's invention-assignment provisions are not merely technical compliance issues — they pose a material business risk that strikes at the core of the Company's value proposition and enterprise value.
Lumos's FY 2023 R&D expenditure of $18.4 million represents approximately 43.5% of the Company's $42.3 million ARR. This level of R&D investment reflects the Company's strategic commitment to the continuous development and refinement of its proprietary AI/ML-based predictive analytics and fraud-detection technology. The Company's $410 million post-money valuation following the Series C financing is substantially attributable to its proprietary technology and the competitive advantages that technology confers.
The Senior Engineer / Data Scientist tier — comprising 38 California employees — is the primary contributor to Lumos's intellectual property portfolio. This tier includes the engineers, data scientists, and machine-learning researchers who are directly responsible for developing and refining Lumos's core algorithms, machine-learning models, data pipelines, and fraud-detection systems. Clear and enforceable invention-assignment provisions for this tier are not merely a legal best practice; they are a business necessity.
The deficiencies in the existing provisions could jeopardize Lumos's ability to demonstrate clear, unambiguous IP ownership — a concern that will arise in multiple contexts:
(a) Future Financing and Valuation. Investors in future financing rounds (whether a Series D, a mezzanine round, or pre-IPO financing) will conduct employment agreement diligence as part of their evaluation of the Company's IP portfolio. Deficient invention-assignment provisions will be flagged, as they were by Ridgeline in the Series C context, and may result in valuation adjustments, additional conditions to closing, or investor reluctance.
(b) M&A and Strategic Transactions. In any acquisition scenario, the acquiring party will conduct extensive IP and employment agreement diligence. Deficient invention-assignment provisions are routinely identified as risk items in acquisition diligence reports and may result in indemnification demands, escrow holdbacks, or purchase-price reductions.
(c) IPO Readiness. If Lumos pursues an initial public offering, the Company's SEC counsel and underwriters will require representations regarding the Company's ownership of its intellectual property. Deficient invention-assignment provisions may result in qualification of those representations, additional risk factor disclosures, or delays in the offering process.
(d) IP Enforcement. If Lumos seeks to enforce its intellectual property rights against a competitor or infringer — whether through patent infringement litigation, trade secret misappropriation claims, or copyright infringement actions — the enforceability of the Company's invention-assignment agreements will be a threshold issue. A defendant may challenge Lumos's standing to bring such claims by arguing that the underlying assignment was unenforceable due to the overbroad scope and missing Section 2870 notice.
Additionally, we note that the agreement of co-founder and CTO Dr. Mei-Lin Zhao should receive specific and individualized attention. Dr. Zhao's central role in the development of Lumos's foundational technology — the core machine-learning architecture and fraud-detection methodology upon which the Company's products are built — makes clear title to her contributions of paramount importance. Her agreement should address pre-formation intellectual property (i.e., any technology developed before Lumos's incorporation in 2019 that was contributed to the Company), as well as ongoing invention-assignment obligations. Given her dual status as co-founder and employee,