Different states have different rules regarding the validity of non-compete agreements. In California, non-compete agreements are heavily disfavored and will usually only be upheld in a limited number of circumstances. When drafting a non-compete agreement, it is important to keep in mind where the employment will be taking place, so that you can know what types of non-compete agreements are allowable in that location.
Background
California, in general, finds that non-compete agreements after the termination of the employment agreement are not valid and will not be upheld by the courts except in specific circumstances. The California Business and Professions Code Section 16600 states: “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.” The courts have strictly applied Section 16600 and used this provision to invalidate employment agreements that would have prevented the employee from working for a competitor after the completion of employment.
The courts will not only invalidate an employment agreement that includes an invalid non-compete clause, but they will also take matters a step further. In California, the courts have found that employers can be liable for wrongful termination if they terminate or otherwise discharge an employee who was not willing to sign an employment agreement that included an unenforceable non-compete clause.
An employer will not be able to avoid Section 16600 by using a choice of law provision in the employment contract. An example of this would be if an employer tried to use a choice of law provision that indicates for any employment disputes the laws of another state that allows non-compete agreements would apply. Instead of looking at the choice of law set out in the contract, the courts will instead decide if section 16600 will apply to the employment agreement by looking at where the majority of the employment will occur. If the majority of the employment will occur in California, then section 16600 will apply regardless of any choice of law provision that was included in the employment agreement.
If a non-compete agreement is found to be too broad under section 16600, the California courts will not rewrite or change the broad provision in order to make them valid. This leaves it up to the employer to ensure the non-compete clause is one that will be allowable under section 16600.
Allowable Non-Compete Agreements
An exception to this can be found in the California Business and Professions Code Section 16601 which will allow an agreement not to carry on a similar business that is located within the same geographic area that a business is sold when the owner of business is selling his/her ownership interest.
California will allow a non-compete clause and other similar restrictions during an employee’s employment term. While a person is employed, he/she owes to the employer a common-law duty of loyalty. This duty of loyalty to the employer may be set out more specifically in a contract. This contract can include terms that can prevent the employee from doing certain things while he/she is still employed by the employer including “competing with the employer in any way, whether by soliciting the employer’s customers or employees, by using the employer’s trade secrets, or otherwise.”
Another type of agreement that is permitted under California law is an agreement that an employee will not continue to use or that an employee will not disclose what trade secrets a company has both during and after employment.
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