Do Non-Compete Agreements in California Carry their Weight in Court?
A non-compete agreement is a contract between the employer and an employee whereby the employee agrees not to compete with his ex-employer when he leaves the employ of that company. In other words, the employee may not contact customers of his old employer and solicit their business. The purpose is to protect the employer from the employee using confidential knowledge acquired during his employment which can be used to compete against the old employer.
In most cases non-compete agreements are not enforceable in California. Business and Professions Code § 16600 provides that:
“every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Section 16600
invalidates agreements to preclude employment in a certain line of work. The section has also been construed by California courts as invalidating agreements that seek to prevent former employees from accepting work from any of the former employer’s clients. (Morris v. Harris (1954) 127 Cal.App.2d 476.) A former employee may also solicit employees from his or her former employer if unlawful means or acts of unfair competition are not used. (Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244.)
Even though non-compete agreements are generally not legal, many companies require their employees to sign non-compete agreements to deter an employee from competing or using his/her knowledge after leaving. If you have been asked to sign a non-compete it most likely is non-enforceable, or at least much more limited than it appears.
There are a few exceptions where non-compete agreements may be enforceable.
• Business ownership exception: It applies when a shareholder “sells” their stock to another for valuable consideration. (Hilb, Royal & Hamilton Ins. Services v. Robb (1995) 33 Cal.App.4th 1812, 1824-1825.)
• Partnership Exception: Business & Professions Code § 16602. However, not every agreement restricting competition between partners is valid. A “rule of reason” applies. (Howard v. Babcock (1993) 6 Cal.4th 409.) For example, a partnership agreement may validly restrict competition by precluding withdrawing partners from practicing in a limited geographic area. (Id.) Unlike business sales and section 16601, there is no requirement pursuant to section 16602 that compensation for goodwill in the partnership be transferred. South Bay Radiology Medical Associates v. Asher (1990) 220 Cal.App.3d1074, 1083.
Labor law is complex; if you have any questions regarding your employment it is recommended that you contact a California labor law attorney who can help you understand your rights and in many cases will review your situation without charge.
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