Non-Compete Agreements in California

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Non-compete agreements are void in California except in certain limited circumstances.  More specifically, California’s Business & Professions Code § 16600 states: “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.”

This means that non-competition clauses in employment agreements that purport to prohibit an employee from working for a competitor or starting a competing business after the employee leaves are void.  This is true in California, even if the prohibition is limited to a certain geographic area or for a limited period of time.  This is because California fiercely protects a person’s right to work and to engage in the profession of his or her choice, including working for a competitor or starting a competing business.

Under what circumstances are non-compete agreements valid in California?

Although the general rule is that agreements that prohibits someone from competing or engaging in a lawful profession, trade, or business is void, there are specific circumstances where a court will uphold a non-compete agreement.  These include:

  1. When a business owner sells a business.

Non-compete agreements are valid when they are part of the sale of a business when the business owner sells the goodwill of a company to the new owner or when someone sells all of his or her ownership interest in a business that sells its assets and goodwill (or those of a division or subsidiary of the business) to someone else.  (Bus. & Prof. Code § 16601)  In this circumstance, the agreement is valid if it is limited to a specified geographic area in which the business is sold, for as long as the buyer carries on a similar business.

  1. When a partnership ends or limited liability company dissolves.

Non-compete agreements are also valid when a partnership ends because of a dissolution or a partner leaves or when a limited liability company dissolves as long as the prohibition is limited to a certain geographic area where the partnership did business so long as any other member of the partnership or any person who buys the goodwill of the partnership carries on a similar business.  (Bus. & Prof. Code §§ 16602 & 16602.5)

Who receives the benefits of California’s protection against non-compete agreements?

The policies against non-compete agreements apply to anyone who works in California.  This is true even if the employer company is based in another state that allows non-compete agreements.  Employees who work in California are also protected even if they sign an agreement stating that the laws of another state will govern the relationship (presumably one that upholds non-compete agreements).  The exception here would be if the employee negotiated the agreement after consulting an attorney of the employee’s choosing.

What other tools does an employer have to protect its business and secrets?

Employers still have many tools at their disposal to protect their businesses and secrets.  The ban on non-compete agreements applies to prohibitions after the termination of the employment relationship.  Thus, clear policies prohibiting employees from moonlighting, working for competitors, and clear conflict of interest rules during the employment relationship are valid and essential.

Additionally, employers may use agreements that prohibit employees from disclosing trade secret and confidential information during and after the employment relationship.  Thus, even though employees may work for a competitor or start a competing business, taking a former employer’s trade secret and/or confidential information could subject the employee (and possibly the new employer) to criminal and civil liability.

Lastly, employers may still have employees agree to non-solicitation of employee clauses.  These are clauses that are designed to prevent employees from raiding their former employer’s workforce.  These are situations where a former employee reaches out to former coworkers or other talent at their old jobs and encourage them to leave and join the new employer or the employee’s own competing business.  However, these non-solicitation of employee clauses must be reasonable.

PRACTICAL TIP:  Employers can do a lot to protect themselves with well-drafted agreements that protect its trade secrets, confidential information, and workforce.  When leaving, employees should review all documents signed at the beginning of the employment relationship and understand any continuing obligations you may have.  Be sure to return all company property, including any company documents in your possession.

Read about what to do when employee leaves.

Contact me at (949) 529-0007 if you have questions about a non-compete agreement or California employment law or business disputes in general.

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In: Contracts, Employment Law

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