September 28, 2020

Volume X, Number 272

September 28, 2020

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September 25, 2020

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Court Holds That An Employer May Rely On Employee's Promise Not To Compete

In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), the California Supreme Court held that covenants not to compete were "invalid under section 16600 in California, even if narrowly drawn, unless they fall within the applicable statutory exceptions of section 16601, 16603, or 16602.5".  Id. at 955.  What has always troubled me about this statement is that none of the listed statutory exceptions concern an employee's agreement not to compete with his or her employer while employed.

Yesterday, the California Court of Appeal held that notwithstanding Edwards a promise not to compete with an employer while employed is not void.  Techno Lite, Inc. v. Emcod, LLC, 2020 Cal. App. LEXIS 41.  The case involved an appeal from the trial court's holding the defendants liable for fraud.  The defendants argued that the false promise not to compete on which the fraud was based was void because it violated section 16600.  Justice Nora M. Manella writing for the panel found it "obvious that no firmly established principle of public policy authorizes an employee to become his employer's competitor while still employed".  Thus, "section 16600 is not an invitation to employees to bite the hand that feeds them."  

Other portions of the Court of Appeal's opinion were not certified for publication and are subject to court rules limiting citation and reliance.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...