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California Law on Non-Competition Agreements

In California, both a state statute and numerous court decisions say that non-competition agreements are not enforceable, and delving into the reasons why can help business owners understand how to work around needing them. The term “non-competition agreement” generally refers to a contract between an employee and an employer stating that the employee cannot go work for a competitor for a certain time period after he leaves his current job. These agreements are also commonly called non-competes and covenants not to compete.

The state statute prohibiting non-competition agreements reads: “

[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” California Business and Professions Code § 16600. There are a few brief exceptional situations where such an agreement may be made: 1) by a business owner after the sale of his business or a subsidiary; 2) by a partner after dissolution of his partnership or dissociation of him as a partner; and 3) by a limited liability company member after or in anticipation of the dissolution of the company or the termination of the member’s interest. California Business and Professions Code §§ 16601, 16602, 16602.5.Courts have held that Section 16600 prohibits restraints on trade, including non-competition agreements. See, e.g., Edwards v. Arthur Andersen (2008) 44 Cal.4th 937; Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 895; Metro. Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859-60; Scott v. Snelling & Snelling, Inc. (N.D. Cal. 1990) 732 F.Supp. 1034, 1042-43. Limitations on time and scope, as found in other states’ valid non-competition agreements, hold no water in California. Further, at least one employer has been held liable for wrongful termination for firing an employee who refused to sign an employment agreement that contained a non-competition agreement. D’Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927.

California’s strong public policy against non-competition agreements and similar restraints on trade originates in the idea that individuals should have the right to pursue the business or profession of their choice. Cont’l Car-Na-Var Corp. v. Moseley (1944) 24 Cal. 2d 104, 110. Similarly, when businesses draft employment contracts, they can choose which state’s law will apply to interpret the contract. By selecting a state in which non-competition agreements are enforceable (though limited in time and scope) as the state whose law will apply to interpret a California employee’s contract, an employer can attempt to get around Section 16600. However, California courts have declined to apply other states’ laws to enforce non-competition agreements. See, e.g., Haller, Anthony B. and Cohen, Andrew B., “Noncompetes a Nonstarter in California? Think Again”, Corporate Counsel, Jan. 6, 2016; see generally Harrison v. Synthes USA Sales, No. 2:12-CV-02704-GEB-AC, 2013 WL 1007662, at *2 (E.D. Cal. Mar. 13, 2013).

Additionally, non-competition agreements are intended to go into effect after an employee leaves an employer. During employment, the employee has a duty of loyalty to the employer derived from the common law relationship between a principal and an agent. See California Labor Code §§ 2860, 2863.

Forward-thinking businesses seek out legal advice before problems arise. Protect yourself and your business by seeking out an experienced business attorney to help you safeguard institutional knowledge. Michael Leonard, Esq., of San Diego Corporate Law, named a “Rising Star” for 2017 by SuperLawyers, has years of experience helping clients draft protective contracts. To schedule a consultation, e-mail San Diego Corporate Law or call Mr. Leonard at (858) 483-9200.

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