Non-Compete Agreements Under California Law
Generally speaking, a non-compete agreement prohibits a former employee from working at a company that competes with his/her former employer’s company after the employee’s employment with his/her former employer ends. Except in very limited circumstances (which are discussed below), non-compete agreements are illegal and unenforceable under California law. This prohibition against non-compete agreements is codified in California Business and Professions Code Section 16600 (“Section 16600”). Section 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.” (Cal. Bus. and Prof. Code Section 16600.)
Below are some additional things that you should know about non-compete provisions under California law:
No. 1: Even narrow and “reasonable” non-compete provisions are illegal under California law. Too often, both employers and employees incorrectly believe that a non-compete provision is legal as long as the provision is not too broad or unreasonable. For instance, let's say that your former employer is a tire company. Your former employer might argue that a non-compete provision is “reasonable” and therefore legal because it prohibits you from working at other tire companies for only one year rather than forever. Or your employer might argue that a non-compete provision is “reasonable” and therefore legal because it prohibits you from working at other tire companies in only one city rather than everywhere in the country.
But under California law, it does not matter if the non-compete provision is "reasonable" (i.e., limited in duration or geographic scope). Non-compete provisions, even "reasonable" ones, are prohibited by California law, except in very limited circumstances. (These limited circumstances are discussed in more detail below (see No. 6).)
No. 2: Non-compete provisions are usually not presented to employees as stand-alone agreements. Instead, non-compete provisions are typically included in employment agreements, offer letters, confidentiality or non-disclosure agreements, or severance or separation agreements.
No. 3: Under California law, your employer cannot require you to sign an employment agreement that contains a non-compete provision as a condition of continued employment. If your employer terminates you for refusing to sign such an agreement, such termination constitutes wrongful discharge in violation of public policy under California law.
No. 4: Non-compete provisions are illegal under California law only if they concern post-employment activities. During the term of your employment, your employer may lawfully prohibit you from “moonlighting” (i.e., working at a second job) for competitors.
No. 5: Remember to review the choice-of-law provision in your employment agreement. A choice-of-law provision is a contractual provision that specifies the state law that will apply if you end up filing a lawsuit against your employer (e.g., for discrimination or failure to pay overtime). Employers may try to enforce a non-compete provision against you by including a choice-of-law provision that specifies the application of a state law other than California law because, unlike California, many states recognize and permit non-compete provisions.
Fortunately, this oft-used technique by employers is more difficult to implement as a result of California Labor Code Section 925 (“Section 925”), which went into effect on January 1, 2017. Among other things, Section 925 prohibits employers from requiring employees who primarily live and work in California from litigating employment disputes under any law other than California law. Click here to read more about Section 925.
No. 6: Non-compete provisions are permitted under California law in the following very limited circumstances:
(a) Sale of a business. If you sell (a) your business’s goodwill, (b) all of your ownership interest in a business, or (c) all or substantially all of the business’s operating assets and goodwill, you may agree with the buyer to refrain from carrying on a similar business within the geographic area where the business sold has been carried on as long as the buyer carries on a similar business in that geographic area. The rationale for this exception is that it would be “unfair” for the seller of a business to be able to compete with the buyer after the sale and thereby reduce the value of the business sold.
(b) Partnerships. In the event of a partnership dissolution, any partner may agree that he/she will not carry on a similar business within the geographic area where the partnership business has been transacted as long as any other partner or anyone deriving title to the business carries on a similar business in the same geographic area. Likewise, in the event of a dissociation of a partner from a partnership, the dissociating partner may agree to do the same.
(c) Limited Liability Companies (“LLCs”). In the event of a dissolution of or termination of his/her interest in an LLC, an LLC member may agree that he/she will not carry on a similar business within the geographic area where the LLC business has been transacted as long as any other LLC member or anyone deriving title to the business carries on a similar business in the same geographic area.
If you have questions about non-compete provisions, call ((916) 612-0326) or email (firstname.lastname@example.org) Finley Employment Law today. We serve clients throughout California, including Sacramento, Folsom, Roseville, Granite Bay, and Elk Grove.
The information in this blog post is for general informational and advertising purposes only and is not, nor is it intended to be, legal advice. Instead, you should speak with a California employment attorney for advice regarding your individual situation.