Generally speaking, non-compete agreements are not enforceable in California against former employees.  (See Business & Professions Code section 16600) California courts have routinely held that such covenants violate the state’s public policy favoring the right of employees to change jobs freely.  However, such agreements can be enforced against former business partners, former members of a limited liability company (“LLC”) and parties to the sale of a business.  In some limited cases, California courts may enforce non-solicitation and non-disclosure agreements, which can sometimes limit an employee’s future employment prospects.

What Is A Non-Compete Agreement?

A non-compete agreement is a contract restricting an employee’s ability to compete with a business, usually after termination of a relationship with that business.  The purpose is to shield an employer from the expense of training an employee, who then quits and puts those skills to work for a competitor.  Many states allow non-compete agreements but California does not.  Business & 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.”

California courts have consistently interpreted this language to mean that, agreements restricting employees from competing with their former employers create an unreasonable restraint on trade and are void as a matter of law.

When are Non-Competes Allowed?

Non-Competes are allowed under certain exceptions with Partnerships, LLCs and in the context of the sale of business or an interest in a business. These exceptions can be found under Business & Professions Code sections 16601, 16602 and 16603.

Partnerships

In some circumstances, California law enforces non-competes as it relates to a business partnership.  In anticipation of a partnership dissolving or a partner leaving, partners can agree “not [to] carry on a similar business within a specified geographic area where the partnership business was transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from any such other member of the partnership, carries on a like business therein.”

For example, a partner in a law firm may agree not to compete with that partnership in a geographic area that the partnership has continued to do business, if she chooses to leave and start her own law firm.  The partnership can enforce that obligation against its former partner, even though it could not enforce an identical restraint against a former associate attorney.

LLCs

Like partnerships, California statutes allow for the enforcement of non-compete agreements against former members of a LLC.  The law allows non-competes to be entered in, when the LLC is going to be dissolved, or alternatively, a member is going to be dissolved.  That member’s ability to complete with another member or anyone carrying on the LLC’s business, in a geographic area where the LLC has done and continues to do business.  Notably, this exception might permit enforcement of a non-compete against an employee who was also a LLC member, provided the restriction in the agreement are tailored to that person’s role as a member.

Sale of Business or Interest in Business

When a business is being sold, including its goodwill, or someone is selling their interest in the business, the parties can agree that the seller will not compete with the business in the geographic area where the business has done and continues to do business.  This exception to the prohibition on non-compete agreements applies in the sale of a partnership interest, LLC membership interest, capital stock in a corporation and a subsidiary of a business entity.  This restriction could apply to a former employee who owned and sold interests in a business, provided that the restriction is properly tailored.

How are Non-Solicit Agreements Treated in California?

A non-solicitation agreement generally prohibits a person from soliciting a business relationship or transaction from certain persons or enterprises.  Employers include non-solicit provisions in employment contracts when they want to prevent an employee from soliciting the employer’s clients or customers after the employment ends. Like non-competes, the premise of a non-solicit is that an employee might unfairly capitalize on the employer’s investment in the client or customer development to the employer’s detriment.  

For the same reasons, California law generally prohibits the enforcement of non-solicitation agreements against former employees, because those agreements tend to restrain people from engaging in their professions or occupations.  However, California courts may enforce a non-solicitation agreement against a former employee if its core purpose is to protect the employer’s trade secrets or confidential business information.

A clause prohibiting departing employees from soliciting their former employers’ customers or business may be enforceable depending on the facts.  Frequently, the courts will examine whether customer lists or other business information constitutes a “trade secret”.  If they do, then departing employees cannot use them for their own benefit or for the benefit of a third party, and a business non-solicitation limitation will be held enforceable.  

Under the exceptions of Business & Professions Code section 16600, California law generally prohibits enforcement of non-solicitation agreements against partners, LLC members, and parties to the sale of a business or business interests, provided the agreement relates to the conduct of the business in a specified geographic area.

How are Non-Disclosure Agreements and Similar Confidentiality Clauses Treated in California?

Employees often have access to proprietary and sensitive company information during their employment.  Employers have an interest in protecting against the misappropriation of that information and an employee leaves. For this reason, employment contracts often contain confidentiality and/or non-disclosure provisions prohibiting an employee from sharing or using an employer’s trade secrets and other confidential information post-employment.  

Unlike non-competes and non-solicitation agreements, California courts generally will enforce these non-disclosure agreements, even against former employees, and even if they potential impact an employee’s future employment prospects, so longas they protect information validly characterized as a trade secret or entitled to confidentiality.  Courts in California will reject non-disclosure agreements (“NDAs”)  that define the protected information so over-broadly that they effectively act as non-competes or non-solicits that unlawfully restrain former employees.  

If you have a question about the enforceability of a non-compete, non-solicit or non-disclosure agreement for an employment contract in California, please reach out to speak with us at Salusky Law Group at (562) 855-0004.