Don’t Rely on a Non-Competition Agreement to Protect Your California Business.

After investing so much in your employees, and after giving them the tools and information they need to contribute to your company's success, you certainly don't want them to take the accumulated wisdom that you largely provided and use it in the service of one of your competitors. Your small California business would no doubt suffer if your top salesman, key officer, or other star moved across the street and started competing against you, so perhaps you had them execute an agreement when they were hired in which they agreed not to compete with your business for a certain period of time and/or in a specific geographic area in the event they leave your employ. Smart thinking. Unfortunately, that "non-competition agreement" will likely do you absolutely no good and will not be enforced in the Golden State.

Prohibited by Statute

Non-competes, as they are sometimes called, are specifically prohibited by Section 16600 of the California Business and Professions Code which provides that, with limited and specified exceptions, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Courts do not hesitate to dismiss claims which attempt to enforce non-competes, as Section 16600 is a clear "expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice." Hill Medical Corp. v. Wycoff, 86 Cal. App. 4th 895, 900, 901 (2001).

Even "Non-Solicitation" Agreements May Not Be Upheld

Some California decisions have treated "non-solicitation" agreements, which are designed to keep former employees from directly or indirectly going after clients and customers of their former employer, as though they are non-competition covenants prohibited by Section 16600. In The Retirement Group v. Galante (2009) 176 Cal. App. 4th 1226, 1238, the Court stated:

We distill from the foregoing cases that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee's new business.

Exceptions: Sale or Dissolution of Business

Two specific exceptions to the essentially iron-clad unenforceability of non-competes involve the sale of a business and the dissolution or disassociation of members or partners of an LLC or partnership. Section 16601 provides that a business owner who is selling the assets, goodwill and ownership interests of his business "may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold… has been carried on, so long as the buyer…carries on a like business therein."

This exception, however, does not give the buyer of a business carte blanche to craft an overly broad or burdensome restriction on the seller's future endeavors: "an agreement must be narrowly tailored to the extent it is reasonable and necessary in terms of time, activity and territory to protect the buyer's interest." Monogram Indus., Inc. v. Sar Indus., Inc., 64 Cal App. 3d 692, 698 (1976).

Similarly, Sections 16602 and 16602.5 allow for such agreements when partnerships or LLC's dissolve or when partners or members disassociate from the entity so long as the business will carry on.

Though non-competes and non-solicitation agreements may be unenforceable in California, business owners may still be able to protect confidential or proprietary trade secrets from being used or disclosed by a former employee in certain situations. We will look at "non-disclosure" agreements in an upcoming post.

Meyer & Yee: Sacramento and Roseville Area Business Lawyers

At Meyer & Yee, your business is our business. We partner with our business clients to provide them counsel they can rely on so they can focus on growing their business. The business world is fraught with challenges; your business lawyers should be ready to face those challenges with you head-on. If your business needs reliable, accessible, and personalized counsel, we welcome the opportunity to see how we can help. Please give us a call at (916) 599-7297. We look forward to the privilege of being your attorneys.

This article has been prepared by Meyer & Yee, LLP for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

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