Are Non-Competes Enforceable in California?

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Are Non-Compete Clause in Employment Agreement Enforceable?

In the employer and employee relationship, California is hostile to non-compete agreement or clause against employees. B & P C § 16600 prohibits noncompetition agreements between employers and employees even where the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee. Edwards v. Arthur Andersen LLP (Cal. App. 2d Dist. Aug. 30, 2006), 142 Cal. App. 4th 603.

The following are real cases that invalidate non-complete agreement against employees.

• Every individual possesses, as a form of property, right to pursue any calling, business or profession he may choose; he has right to engage in competitive business for himself and to enter into competition with his former employer, even for business of those who were formerly customers of his former employer, provided such competition is fairly and legally conducted. Fortna v. Martin (Cal. App. 3d Dist. Mar. 24, 1958), 158 Cal. App. 2d 634.
  
  
• B & P C § 16600, invalidates provisions in employment contracts prohibiting an employee from working for a competitor after completion of his employment or imposing a penalty if he does so. Reasonably limited restrictions, such as those necessary to protect the employer’s trade secrets, which tend more to promote than restrain trade and business do not violate the statute. Section 16600 does not invalidate an employee’s agreement not to disclose his former employer’s confidential customer list or other trade secrets or not to solicit those customers. Loral Corporation v. Moyes (Cal. App. 6th Dist. Nov. 8, 1985), 174 Cal. App. 3d 268.
  
  
• Under B & P C § 16600, a non-compete agreement is unenforceable unless an exception exists to prevent application of the statute. The California non-compete law 16600 does not invalidate an employee’s agreement not to disclose his former employer’s confidential customer list or other trade secrets or not to solicit those customers. Thus, while 16600 invalidates non-compete contract which penalize a former employee from obtaining employment with a competitor, it does not necessarily affect a non-compete agreement delimiting how that employee can compete. Similarly, a former employee may engage in a competitive business for herself and compete with her former employer, provided such competition is fair and legal. A former employee’s use of confidential information obtained from the former employer to compete with that employer and to solicit the business of the former employer’s customers is regarded as unfair competition. John F. Matull & Associates, Inc. v. Cloutier (Cal. App. 2d Dist. Sept. 16, 1987), 194 Cal. App. 3d 1049.
  
  
• Employee’s complaint against her subsequent employer alleged facts supporting a Tameny claim for wrongful termination in violation of California non-compete law 16600, prohibiting non-compete agreements, where her complaint alleged an “understanding” between the subsequent employer and the former employer pursuant to which the subsequent employer would honor the former employer’s non-compete agreement, and such an “understanding” would be void and unenforceable under § 16600 because it unfairly limited the mobility of an employee and because the former employer should not be allowed to accomplish by indirection that which it could not accomplish directly. Moreover, permitting a Tameny claim against the subsequent employer under the circumstances of the case furthered the interest of employees in their own mobility and betterment, deemed paramount to the competitive business interests of the employers, where neither the employee nor his or her new employer had committed any illegal act accompanying the employment change. Silguero v. Creteguard, Inc. (Cal. App. 2d Dist. July 30, 2010), 187 Cal. App. 4th 60.
  
  
• Employee’s non-compete contract with employer not to engage in competition with him after leaving his services contravenes this section and employer cannot recover liquidated damages stipulated in such contract. Morris v. Harris (Cal. App. Sept. 20, 1954), 127 Cal. App. 2d 476.
  
  
• California non-compete law 16600 invalidates provisions in employment contracts prohibiting employee from working for competitor after completion of his employment or imposing penalty if he does so, unless such provisions are necessary to protect employer’s trade secrets. Muggill v. Reuben H. Donnelley Corp. (Cal. Jan. 19, 1965), 62 Cal. 2d 239.
  
  
• Provision of corporate pension plan which included a non-compete clause, which plan became part of employment contract, that payments shall be suspended or terminated in event any retired employee enters any occupation or does any act which is in competition with any phase of business of his former employer, restrained retired employee from engaging in lawful business and was void under § 16600. Muggill v. Reuben H. Donnelley Corp. (Cal. Jan. 19, 1965), 62 Cal. 2d 239.
  
  
• An employment contract providing in part that the employee agreed to, at the time of his termination of employment, relinquish any right he may have acquired in and to the good will of the employer’s business, was invalid and unenforceable under California non-compete law B&P Code § 16600, providing that every non-compete contract by which anyone is restrained from engaging in a lawful profession, trade, or business is to that extent not enforceable, since it would have operated to restrain the employee from engaging in a lawful business. Golden State Linen Service, Inc. v. Vidalin (Cal. App. 1st Dist. Apr. 15, 1977), 69 Cal. App. 3d 1.
  
  
• Under California non-compete law B&P Code § 16600, which generally invalidates contracts restraining persons from engaging in a lawful profession, trade, or business, contracts not to compete are invalid except where their enforcement is necessary to protect the trade secrets of an employer. Thus, a contract whereby a pest control salesman agreed that, should his employment terminate and should he call on any account that he had called on during his employment, he would pay his employer $50 per such account, was unenforceable, notwithstanding the employer’s contention that the contract was for the assignment of accounts at a fixed price. Gordon Termite Control v. Terrones (Cal. App. 2d Dist. Aug. 22, 1978), 84 Cal. App. 3d 176.
  
  
• An employer cannot lawfully make the signing of an employment agreement, which contains an unenforceable agreement not to compete (B&P Code § 16600), a condition of continued employment, even if such agreement contains choice of law or severability provisions which would enable the employer to enforce the other provisions of the employment agreement. An employer’s termination of an employee who refuses to sign such an agreement constitutes a wrongful termination in violation of public policy. D’Sa v. Playhut, Inc. (Cal. App. 2d Dist. Dec. 21, 2000), 85 Cal. App. 4th 927.
  
  

Workforce Mobility Act

In 2021, Congress introduced the Workforce Mobility Act of 2021 (WMA) limit enforceable of non-compete agreements. If the non-compete bill passes, it would:

• Limit the use of non-competes to situations where there is a partnership dissolution or sales of a business sale of a business.
• Give employees the right to sue for violations of the WMA.

California Attorney General Xavier Becerra today joined a coalition of 19 attorneys general in urging the Federal Trade Commission (FTC) to protect workers by banning non-compete agreements in employment contracts nationwide. President Biden took his first major step to keeping this campaign promise when he issued his Executive Order on Promoting Competition in the American Economy on July 9, 2021.

Non-Complete Agreement States

Presently, several states invalidate non-compete agreements against employees:

• California
• Oklahoma
• North Dakota

Additionally, there are half a dozen states that recognize non-compete agreements for employees with limitations:

• Illinois
• Virginia
• Washington, D.C.
• Oregon
• Maryland
• Nevada

Consequences of Invalid Non-Compete Agreement

The only penalty which the law attaches to non-compete contracts restraining trade is to make them unenforceable. Havemeyer v. Superior Court (Cal. June 9, 1890), 84 Cal. 327, 24 P. 121, 1890 Cal. LEXIS 813.

Although this statute declares non-compete agreement in restraint of trade void, it does not declare them illegal. Brown v. Kling (Cal. Feb. 9, 1894), 101 Cal. 295.

In an action for breach of contract which included a non-compete clause, unfair competition, servicemark infringement and other causes by a radio station against an actor who had been employed to represent the station’s mascot, a comic chicken, a preliminary injunction which enjoined the actor from appearing in “any chicken ensemble or suit whatsoever” was invalid, in that the injunction restricted the actor’s right to earn a living and his First Amendment right to express himself as an artist. KGB, Inc. v. Giannoulas (Cal. App. 4th Dist. Apr. 21, 1980), 104 Cal. App. 3d 844.

Non-compete agreements are only generally reformed if the parties made a mistake. Even an illegal non-compete contract may be entered into without allegation or evidence of mistake; and B & P C § 16600 did not apply to certain confidentiality and nonsolicitation agreements in question. Maxxim Med., Inc. v. Michelson (S.D. Tex. Mar. 25, 1999), 51 F. Supp. 2d 773.