Covenants not to Compete are Generally Invalid in California

Most U.S. states allow employers to draft contracts that include a covenant not to compete. Employers create these covenants to prevent employers from learning the employer’s business and then leaving the company to start a competing business or working with a competitor. Even valid non-compete clauses though require that there be a reasonable basis and scope to the non-compete clause.

The reasonable basis usually meant that the covenant could not be enforced in perpetuity (forever). Most competing restrictions have to be limited to a year or two. The scope basis meant that a former employee could work in the same field if he/she did so in a completely different location such as a different state.

California is one of a few states that has a much more favorable employee position. The California Business and Professions Code Section 16600 provides that “Employment contracts, non-competition agreements, and/or non-solicitation agreements” can be voided if they limit the ability of the employee to work in their chosen profession. Every contract that provides otherwise is considered void.  The provision applies mainly to employment arrangements that are for a specific length of time as opposed to at-will contracts where the employee can be terminated at any time for any reason.

The aim of Section 16600 is to limit the ability of the employee to earn a living once he/she has been terminated from or resigned from the original employer.

Exceptions to the general policy against non-compete clauses

There are some exceptions that the California courts are wrestling with to the general principle that the interest of the employee in bettering himself/herself over the competition concerns of the employer. Very narrow restraints may be allowed if the restraint only applies to a “small or limited part of the business, trade or profession.”

A restraint may be allowed, after the employee has been terminated, if it is necessary to protect the employer’s trade secrets though even this restraint must be carefully limited. Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 859 (1994). For example, customer lists may be considered a trade secret, but if the information is publicly available on the company website it would not be a trade secret.

Companies cannot use the excuse that they are based in another state than California. If the employee works for the company in California, then Section 16600 which voids most non-compete clauses will likely be used to void any form contract or contract drafted with non-California employees in mind.

If an employer is trying to prevent you from working in your chosen career through a non-compete contract clause, you may have a strong case against the employer. For answers to your questions  and tough advocacy, please call Stephen Danz & Associates at 877-789-9707.