23 Jun Employee Covenants Not to Compete Banned by California Law
Employers often include a non-compete clause in their employment agreements. Generally, the purpose of a non-compete clause is to prevent an employee from competing with the employer in a certain region for a specified period of time. The policy rationale is that the employee should not be able to exploit the employer’s proprietary information for personal gain. The clause cannot be so broad, however, that it prohibits the employee from working at all.
As most employers doing business in the state of California can attest, it is difficult, if not impossible, to enforce any non-compete clause in an employment contract that is governed by the state of California. Regardless, domestic and foreign businesses continually attempt to circumvent California’s strict laws regarding employee covenants not to compete.
The history of voiding non-compete clauses in California employment contracts dates back to 1941 when the California legislature passed Section 1660 of the Business and Professions Code. This section of the Code makes it illegal to enforce any contract that is in “restraint of trade,” i.e., any contract by which the employee is restrained from engaging in a lawful profession, trade, or business of any kind. In 2008, the California Supreme Court held this restriction on restraint of trade clauses applies to all employment contracts. Since then it has been clear that non-compete agreements in California employment contracts are unenforceable.
The legislative history and case law in California stand in stark contrast with the way other states do business. While it is generally illegal to operate in restraint of trade in other states, such laws are rarely understood to mean that restrictive covenants in employment contracts are per se unenforceable, particularly when they are strictly tailored to a certain geographical region and the duration is for a reasonable period of time.
The justifications for covenants not to compete include allowing a business to plan for the future by training and investing in its employees with the knowledge that they will stick around to provide a return on the investment. Critics argue, however, that such agreements restrict the ability of an economy to grow by inhibiting talent and innovation.
The preceding argument is the position taken in a recent Forbes opinion article that compares East and West Coast tech development over the last 20 years. On the one hand, you have California, with its explosion of talent and innovation where covenants not to compete are unenforceable and people are free to work wherever they want after the termination of their prior employment. Conversely, in Massachusetts, Boston’s Route 128 tech district has strictly enforced non-compete clauses, which actually stifles local innovation by preventing knowledge spillovers in the technology industry.
Alongside the ongoing policy debates, there have been continuous attempts from all kinds of businesses to enforce non-compete clauses in employment contracts for California employees. One frequently attempted method to circumvent California law is to include a forum selection clause and choice of law clause outside of California, even if all or most of the work is performed in California. Such attempts receive mixed results.
In California, courts are loath to enforce these clauses because they amount to a workaround of its ban on restraint of trade. In other jurisdictions, however, courts are more willing to uphold these clauses and enforce a covenant not to compete as long as it is reasonable in scope and duration. The result is a race to the courthouse to determine the contract’s enforceability.
Your California Business Law Partners
If you own a California business, you may need help understanding covenants not to compete and other aspects of how the state’s employment laws affect your company. At the Royse Law Firm we can help you understand what your options are and counsel your company on a range of issues. Contact us today.