Are Non-Compete Contracts Enforceable in California?

California’s Position on Non-Compete Agreements

California Generally Prohibits Non-Compete Agreements
Outside of a handful of limited exceptions, California’s general posture is that non-compete agreements are void. On this issue, California is in stark contrast to many other states. For example, Texas allows private employers to maintain restrictions on former employees, and, at least in some respects, Indiana generally does as well. In fact, U.S. Supreme Court Justice Antonin Scalia once lamented that California is "so far away from the rest of the country — you know, Texas looks as if it is in the same country with us — there is no question that California is an aberration and will remain so." (In 2012, Justice Scalia updated his opinion. "As recent developments demonstrate," he wrote, "the notion that California law applies only in California is hardly consistent with our society’s notion of the interstate market and has no basis outside of California.")
In 1872, California proclaimed that "every contract by which anyone is restrained from engaging in a lawful profession , trade, or business of any kind" is to be "void" (Cal. Bus. & Prof. Code § 16600). In 1919, the California Supreme Court declared that a provision in an employment agreement by which the employee agreed not to engage in any occupation within the same city was void under the predecessor to Section 16600. ( Edwards v. Arthur Anderson LLP, 44 Cal.4th 937 (2008).)
However, there are several narrow exceptions to the general rule. Section 16600, for example, does not apply to restrictions on partners and some corporate shareholders. For a discussion of other exceptions to Section 16600, see general post.
Also, prior to 1 January 2012, Section 16600 made an exception for covenants not to compete in the sale of goodwill. Section 16600 has been amended by Senate Bill 469, effective January 1 of this year, to make such a covenant voidable at the option of one of the parties. At least for now, the amended version of Section 16600 is to be understood as providing greater protection to employers against key employees who leave to start a competing business.

Limitations of the Rule

While California law prevents employers from imposing non-compete restrictions to protect their legitimate business interests in most situations, the law does recognize certain exceptions. For example, limited restrictions on competitive activity may be permissible when they are reasonably related to a particular business asset. Under California law, the sale of a business is one such valid exception. In this context, a seller of a business may agree not to engage in a competitive business in the market area where the business is sold for up to 10 years. (Cal. B&P Code §16601) This means that the seller may not move into the buyer’s market and attempt to compete directly against the buyer. Becoming a direct competitor should be considered when determining the amount to pay for a business and structuring the terms of the sale.
Another commonly-cited exception is in the context of dissolution of a partnership or other association. Under California law, partners may agree not to compete with their former partners within the scope of the former partnership’s business for a period of time up to five years. (Cal. B&P Code §16602(1)) To the extent that the agreement is reasonable as to time, activities to be restrained, and geographic area, then it is likely enforceable.
While in the above cases, California law allows for reasonable restrictions on practices of former owners and/or partners, including both employee non-compete and nonsolicitation agreements, these exceptions are not so broad that they permit all existing non-competition or nonsolicitation agreements. Courts will closely evaluate each agreement within the context of its circumstances to determine whether it is within the bounds recognized by California law. In other words, even if a non-compete restriction is made in connection with the sale of a company, it may still exceed the limits of California law. For example, an agreement not to work in the industry for 50 miles for 10 years might be too far-reaching.

Consequences for Employers and Employees

The prohibition of non-compete agreements affects employers and employees in different ways. Some employers welcome the prohibition and some employers are adversely affected.
Employers
Non-compete prohibitions may make California a more desirable location to do business for some companies. For example, if a production or tech company wants to be able to hire the best talent from competitors, it will find a larger pool of employees to draw from if a ban is in place. Employers who have done significant business in other states may wonder why they should have to change their human resources practices.
Employees
For the employee, the competition among employers for top talent may mean higher wages and more opportunities to move between firms within the same industry.
It is important to point out that these employees are not free to act however they like. Employees may be free to work for the competitor, but their freedom of movement is not without limitations. Employers can expect to have to train new employees because an employee with knowledge of his former employer’s practices may have an advantage. The ban on non-compete agreements makes it easier for a plaintiff to bring successful trade secret claims against a former employee. As a result, employees of California companies must exercise caution when leaving a California business.
The ban on non-compete agreements will change how companies build their teams and how employees choose where to work.

Civil Enforcement and Fines

While state law prohibits the enforcement of non-compete agreements in the State of California, those that try to get around the law suffer serious consequences.
California courts enforce the State’s laws against the enforcement of non-compete agreements. They have the power to order injunctive relief, damages, or both against those who attempt to impose or enforce a non-compete agreement that is illegal under California law. In California, those who try to circumvent the prohibition on non-compete agreements face other penalties as well. The Business Code gives the court the power to award attorneys’ fees and costs to the successful party, even a third party that does not have an interest in the subject of the agreement (e.g., an employer, employee, customer, competitor, or local government). Thus, a former employer may find itself liable for substantial legal fees after seeking to enforce a non-compete agreement, even if the employer does not win. In addition, California imposes a $5 , 000 civil penalty for each violation of the prohibition on non-compete agreements. This civil penalty is a further deterrent to enforcement in California courts. Certain common practices are used by employers attempting to circumvent the law in California. Oftentimes they try to convince employees to sign a non-compete agreement while they are still employed. Sometimes, employers will threaten to fire an employee unless that person signs the non-compete. In some cases, employees will be asked to sign a non-compete at the time they leave the company, making it seem as if the non-compete is a standard termination document. Finally, employers may draft non-compete agreements that appear to be otherwise lawful and within the scope of what is permissible in order to avoid stricter scrutiny. Anytime an employer attempts to enforce a non-compete agreement, even if it was signed at the onset of employment (despite it being clear that the company did not actually intend to be bound by it), he or she opens themselves up to the risks and costs associated with such agreements.

How Employees Should Handle Employment Agreements

Navigating Employment Contracts in California requires creativity
While recent case law and the new "Bainbridge" statute have made things a little easier for employers seeking to protect their business by drafting useful non-competition clauses, there are still many important limitations, and any contract restricting competition is going to be regarded with suspicion and require a careful balancing of employer needs against employee interests. Although the default rule remains that a California contract regarding employment must not "impose a restraint on someone’s ability to pursue a profession, trade or business," and so non-competition contracts are "void," there are ways to construct an employment contract that can be enforceable against a former employee if the need arises.
Generally speaking, a restrictive clause in a California employment contract needs to be reasonable in time, area and scope to be valid. Many clauses fail before they even get to court because they are drafted too broadly. If an agreement is reasonable, the burden shifts to the employee to show why it is not. If that is met, the burden shifts back to the employer to show it is reasonable. Where it is critical to protect my client’s business is in misappropriation of trade secret cases. To protect my client from loss of his trade secrets, it is worth it to "hold up" on a contract with a new employee for a few extra weeks or even months while I negotiate an enforceable contract.

Legal Counsel and Information

If you are working in California and worry that your employer has made you sign a non-compete agreement or is expecting you to sign one, contact a California lawyer as soon as possible. The legal professionalism rules for California lawyers require the lawyer to accept clients so long as it is not technically impossible for them to do anything or it would otherwise present a conflict of interest. Retaining a lawyer is the best way to get the help you require. It is important to get legal advice as soon as possible before the agreement takes effect, and before your employer expects you to sign one. If you are beginning to feel uncomfortable about your working conditions or have received an ultimatum, you should act fast.
California laws are specific and enforceable, but unless a client follows advice from their lawyer, any legal advice can be rendered completely ineffective. If the person who signed the agreement refuses to take action outlined in the advice, then nothing can be done, which allows the clause to be effective. It is also important to remember that lawsuits can be complicated . They often take years to settle or go to trial. On one side of the coin, there is a dramatic difference between a well-prepared lawyer who has done the legwork and followed the law and can present the case and make it as simple as possible to judge, and has failed to do so. This is especially true if the lawyer ignores their clients and ignores their wishes or if the lawyer has an unexpected bias against the client. On the other side of the coin, there is the lawyer who has never seen a case like this and believes they can do exactly the same job, and it could take much longer to get your case heard by the court. While there is always a risk with a lawsuit, a California non-compete lawyer can guide you in minimizing the risk.
There are countless resources available with information on this issue. At the very first meeting, you will know for sure if you should move forward with legal representation. You can then figure out if the representation of that case is in the best interest, but the first step is consulting a California employment lawyer, who in this case is a lawyer.