The Basics of Non-Competition Agreements in California

Validity of Non-Competition Clauses in California

The legal status of non-compete clauses in California is quite strict. California is one of the few states that prohibits non-compete agreements in their entirety. Therefore, typically, a California employer can not prevent a departing employee from working for a competitor or starting his/her own competitive business.
California Business and Professions Code Section 16600 explicitly states that:
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.
California courts have repeatedly upheld Section 16600 as a statute of broad application.
The only exceptions that have been recognized in California to Section 16600 are for partnerships , LLCs and corporations. In these cases, there is no blanket prohibition against non-compete clauses, but rather there are limited situations in which they can be used. For example: Partnership, LLC and corporate agreement’s provisions for protection of goodwill and/or dissolution are not void under Section 16600 if they are reasonable in duration and scope.
California law sharply contrasts with most other states, which permit and uphold many types of temporary post-employment non-compete agreements, provided they are reasonable in duration and geographic scope. Non-competes are routinely enforced in states such as Texas, Florida, and Utah. These states’ laws are often analyzed to interpret California’s non-compete laws.

Non-Competes: Why They’re Generally Not Legal

For these very reasons, as well as others, California courts have long been hostile toward agreements in restraint of trade. In the early 20th century, the California Supreme Court, in a series of cases, firmly rejected suggestions that California adopt the accepted common law rule recognizing the right of an employer to enforce covenants not to compete in order to protect their legitimate interests even if the employee’s right to work in his or her chosen vocation was restricted. As a result, California Courts of Appeal have held that "prior California decisions reflect a ‘well-settled public policy against restraints of trade’ and . . . ‘[o]ur Supreme Court has stated that "the sound view is that such covenants are invalid as restraints of trade."’"
A lot has changed since then—especially the amount of wealth at stake. However, the superior economic underpinnings of the rule remain equally valid. There is no reason for the rule to change. The rule still serves to promote individual job mobility, expanding the availability of job opportunities. And it continues to prevent potential employer monopolies in any market by preventing enforcement of non-compete agreements.
On this point, the Public Policy Considerations simply do not make sense in regards to the execution of some new contract. What interest does the employee have to keep their prior experience and expertise secret from their new employer? Assuming that they are succeeding in their new opportunity, the employees own interest is just not to perform below expectations. The market needs to reward success.

Exceptions to the Non-Competition Rule in California

Despite California’s general prohibition against non-compete clauses, California courts have carved out specific exceptions where non-compete agreements may be enforceable. A non-compete clause may be enforceable under the following limited circumstances:

• Sale of a business, including goodwill. For example, if an employee or business owner sells his or her business and will continue to provide services for another business, then the sale of the business may include a non-compete agreement.
• Director or manager of corporation. A non-compete clause may be enforced against a corporate director or a corporate officer if the non-compete clause does not exceed the reasonably necessary protection of the corporation. However, these restrictions are narrowly construed under California law.
• Transfer of partnership interests. If the non-compete clause is signed when a current or potential partner buys into an existing business with the intention of acquiring the value of the interest acquired, then a non-compete clause may be enforced against a partner.
• Executive officers and employees. Executives and key employees of a company can be restricted by a non-compete clause. For example, salespersons, divisional managers, plant managers, and executive officers may all be restricted by a non-compete clause.
• "Special circumstances." For instance, the sale or lease of goodwill or substantially all of the operating assets of a business. Also, if a person sells the goodwill of a business that he actually owns into a corporation, the anti-competitive impact of the provision on the person’s ability to compete or establish a competitive business is negligible because the corporation is not established until after the sale is consummated.

How Do Non-Competes Affect Workers and Employers?

The prohibition of non-compete clauses carries specific implications for both employees and employers. For employees, the immediate benefit is apparent: ability to freely pursue job opportunities of their choice. Such freedom encourages career growth and mobility. However, some employees may become privy to sensitive information about a former employer’s business practices or client base that could be used to their advantage in a subsequent position. The absence of a non-compete agreement can also discourage employees from disclosing such information in the case of job recruitment. Thus, the absence of a non-compete may encourage employees to act with more transparency , giving an employer a chance to directly address the employee’s concerns.
Employers face critical concerns, as well. The loss of employees who have acquired irreplaceable skills and nuanced knowledge about a company’s operations can result in gaps that competitors will move swiftly to fill. That said, an active work environment can serve a company’s interests just as well as a stable work force. And while confidentiality agreements do serve to protect an employer’s proprietary information from being disclosed, the risk remains that an employee will take the information or share it with a competitor.

Other Options Instead of Non-Compete Agreements

There are alternatives to non-compete agreements for California businesses. A few alternatives include a confidentiality agreement, or non-solicitation agreement. While a confidentiality agreement can help keep an employee from disclosing a trade secret or confidential information, a non-solicitation agreement can protect the business by preventing employees that leave from taking customers with them to the employee’s new place of work. Additionally, a no-hire agreement can serve the same purpose by preventing a business from hiring the ex-employee’s new employer’s employees. One thing to keep in mind is that these types of clauses must be reasonable in order to be enforceable.

Recent Case Law and Effects

Since the California Business and Professions Code § 16600 was enacted, the courts have endeavored to provide a clear definition of what is considered "to a competitor" by focusing on whether the former employee’s new position competes with the previous employer’s business.
While there have been similar cases over at least the last 50 years, in the last few years there have been several noteworthy non-compete cases. While these cases all vary in specific details, they all contain some common elements; primarily they each involved a litigation with significant settlement amounts involving an attorney and a former client. These cases also involve a former client that had significant leverage to negotiate the so-called "buyout" amount from the former attorney. Below is an overview of some of the notable recent non-compete cases.
In Global Van Lines, (1983) 144 Cal. App. 3d 481, the court held that the former employee could not enforce the covenant not to compete against the former employer despite having received a significant payment for the value of the covenant not to compete. The court reiterated that California Business and Professions Code § 16600 prohibits the restraint of trade.
In Guthy-Renker Finance, LLC v. Marktrend LLC (2016) 1 Cal.App.5th 1338, 1345-1346, the court stated that covenants not to compete are void and may not be enforced even if the employer paid for the agreement by compensating the employee for the loss of future income or purchasing the covenant.
In Board of Trustees of University of Illinois v. American Academic Science Center (2015) 374 Ill.App.3d 85 , 90, the court held that even where there was a contract to pay for the covenant, the parties did not have the right to enforce the covenant against the former employee.
The case of AMN Healthcare, Inc. v. Aya Healthcare Services, 28 Cal. App. 5th 923 (2018) revolved around whether the buyer of a company could enforce the non-compete agreements of the employees. The court ultimately held that the non-compete agreements were not enforceable by the buyer of the company.
In Golden v. California Emergency Physicians Medical Grp., 52 Cal.4th 333 (2011), the court faced a situation where the parties had negotiated the terms of the employees’ compensation as it related to the covenant not to compete. However, the employer could not show that the covenant not to compete advanced any interest beyond the employer’s desire to stifle competition and consumer choice. See also, Koller v. Westlake Sentry L.P., No. B278766, 2019 WL 3916005 *2 (Cal. Ct. App. Aug. 20, 2019) (holding non-compete void under California law); Kindred Healthcare, Inc. v. CPT Med. Servs., Inc., 240 Cal.App.4th 1166 (2015) (finding that California law does not permit nondisclosure covenants to be considered in evaluating the interests of the employer); Salesforce.com, Inc. v. Veeva Systems, Inc., CV 13-1860 PSG (FFMx), 2014 WL 3610989, at 13 (C.D. Cal. Feb. 25, 2014) (holding that an agreement to comply with any confidentiality obligations in California does not prohibit competition).