In the vast majority of states, noncompete agreements are generally enforceable as long as they’re reasonable in terms of having a genuine business need, an appropriate geographic scope and an appropriate time duration. However, California law differs significantly from most states in this regard.
“In California it’s a much different story. In California we have Business & Professions Code section 16600. Most of you know that prohibits all forms of noncompetition agreements with very, very limited exception.” Daniel Ko Obuhanych outlined in a recent CER webinar.
Where does this leave California employers?
Are out-of-state noncompete agreement enforceable?
“The benefits of having a noncompetition restriction is that it’s a deterrent for employees—both to leave the company and against competing against the company after they leave.” Obuhanych explained. This is the main reason employers are keen to use them when possible, and why it is important to know the limitations as well as when they can be used despite being against California law.
While noncompete agreements are generally unenforceable amongst California employers, it gets more complex when dealing with an agreement signed out of state for an employee who now wants to work for a competitor in California. This is a very tricky area, and, unfortunately, case law does not clarify the issue, since cases have been decided both ways (upholding the noncompete agreements in some and dismissing them in others), depending on the specifics of the case. The important thing to remember is that California employers cannot assume that the Business & Professions Code section 16600 will guarantee that no out-of-state noncompete agreements will be valid; agreements from other states may still be upheld when appropriate.
Is there a way to use noncompete agreements, even if they’re not enforceable?
Some employers wonder: Even if unenforceable, how safe is it to ask an employee to sign a noncompete agreement anyway to deter post-employment competition?
In short, this is not a safe plan. “We have a case called D’Sa vs. Playhut—in that case, the employer asked the employee to sign a noncompetition agreement in California. The employee refused to sign it and the company fired the employee. So the employee obviously sued the employer.” Obuhanych explained. The court agreed that this was a case of wrongful termination.
The other problem with trying to include a noncompetition agreement in California is that the employer risks invalidating the entire employment contract due to including an unlawful provision.
The above information is excerpted from the webinar “Employment Agreements in California: Make Non-solicitation Clauses, Class Action Waivers, and Mandatory Arbitration Work.” To register for a future webinar, visit CER webinars.
Dan Ko Obuhanych is an attorney in the Employment Practices Group of Fenwick & West LLP in Mountain View. He focuses on labor and employment law, litigating unfair labor practice claims, discrimination/retaliation lawsuits, grievance/arbitration matters and EEOC/DFEH charges.
California law does allow noncompetes in some limited circumstances, like when the covenant is made in connection with the sale of a business, that restrict a seller’s ability to compete with the buyer in the geographic location where the seller conducted his or her business. Also:
• Trade secret protections that restrict an employee’s ability to use confidential information or company-defined trade secrets; and
• Dissolutions of a partnership or limited liability corporation (LLC) that define a geographic area within which one of the former partners or LLC members can’t conduct a similar business.