Non-Compete Laws in California
California law does not allow an employer to require a prospective employee to sign a non-competition agreement as a condition of employment, and its courts will not enforce such an agreement. Although other states permit the use of a non-compete clause when the circumstances are reasonable, California law prohibits their use on the grounds that they limit open competition and employee mobility. The state's Business and Professions Code provides limited exceptions to this rule.
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Background
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When you sign a non-competition agreement, sometimes included in a contract as a non-compete clause, you are agreeing not to compete with the other party in a particular area of business for an identified time period. In 1872 the California Legislature included language in its Civil Code that rejected the common law rule allowing contracts that restrict competition. California courts, including the California Supreme Court, have consistently upheld the law.
Legal Basis
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California Business and Professions Code Section 16600 (formerly Civil Code Section 1673) 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." California courts have applied the statute to non-competition agreements, ruling that they are an illegal restraint on trade. The courts have upheld the right to work for a competitor of your former employer and to solicit the former employer's clients.
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Statutory Exceptions
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California law permits non-competition agreements between the owners of a business in some circumstances. If one of the owners of a business sells all of his ownership interest in the business, the goodwill of a business or a substantial portion of the business assets, including goodwill, the buyer may require a non-competition agreement. Partners and members of limited liability companies may enter non-competition agreements if one of them leaves the business or they dissolve the partnership.
Federal Interpretation
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While the interpretation of state law is normally settled in the courts of that state, as of May 2011, a federal court has jurisdiction when the parties are from two different states and the case involves more than $75,000 in potential damages. The federal Ninth Circuit Court has interpreted California law on non-competition agreements in several cases, finding that non-competition clauses may be acceptable if they place only limited restraints on the employee.
Further Information
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One purpose of a non-competition agreement is to protect confidential business information. Even though California law does not allow you to prevent a former employee from going to work for a competitor or competing with your business herself, you may require employees to sign a nondisclosure agreement, or NDA. The NDA creates a confidential relationship that prevents a former employee from disclosing information such as financial data, client lists and trade secrets.
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References
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