Employee Non-Compete Agreements Invalid in California

Orange County, CA – Are you an employee?  Go find your employment agreement (the contract you signed when you started work at the company) and open it up.  I would bet that 75% of the employment agreements in California have some sort of provision that reads like this:

The undersigned Employee hereby agrees not to directly or indirectly compete with the business of the Company and its successors and assigns during the period of employment and for a period of X years following termination of employment and notwithstanding the cause or reason for termination.

If you’re an employee, you’re in luck.  These “non-compete” clauses (also called “covenants not to compete” or “restrictive covenants”) are almost entirely invalid in California.  If you’re an employer, can you ever restrict your current and former employees from competing?  Find out after the jump…

California Business and Professions Code § 16600 states: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

There are exceptions.

  1. § 16601 – “Any person who sells the goodwill of a business…may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold…so long as the buyer… carries on a like business therein.”  This simply means that if you’re an owner or shareholder of a business, and you sell your interest it to your buddy Fred, you can’t turn around and start competing with Fred right after you sell it.  In one case where a non-compete agreement was held to be enforceable, an officer held only three percent of his employer’s stock. When the employer was being acquired by another company, the employee agreed to sell the stock to the acquirer and as part of the agreement there was the non-compete provision.
  2. § 16602 – “Any partner may…agree that he or she will not carry on a similar business within a specified geographic area where the partnership business has been transacted, so long as any other member of the partnership…carries on a like business therein.”  This is almost the same provision as § 16601 except it is limited to partners in a company, firm, or organization.  Not every agreement restricting competition between partners is valid. A “rule of reason” applies.  Howard v. Babcock (1993) 6 Cal.4th 409.
  3. § 16602.5 – “Any member may, upon or in anticipation of a dissolution of, or the termination of his or her interest in, a limited liability company (LLC)…, agree that he or she or it will not carry on a similar business within a specified geographic area where the limited liability company business has been transacted….”  This is just a reiteration of the same rules in § 16601 and § 16602 that an owner of a business can’t sell it and then compete with the buyer.  This statute just specifies LLC’s.

Since employees may be owners of a business (they can own shares of the company but still be an employee) they can sometimes be restrained from competing if they sell those shares.  However, this is tricky and it is best to consult with an employment attorney before you try to enforce such a clause.

But the main take away is this: in California, it is almost impossible to restrain the average employee from competing with your business once he has been fired/let go.  It is a different story if the employee competes while he is working for your company (duty of loyalty), or takes a trade secret and uses it to unlawfully compete.  But those are different topics covered elsewhere.


Leave a Comment

Filed under Discharge & Layoffs, Duty of Loyalty, Leaving a Job, Non-Compete Agreements, Restrictive Covenants, Retaliation

Leave a Reply

Your email address will not be published.