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New California Labor Code Statute Results In Enforceable Covenant Not To Compete

In October 2016, I wrote about a newly enacted statute, Labor Code Section 925.  That statute prohibits an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

  • Require the employee to adjudicate or arbitrate outside of California a claim arising in California.
  • Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

Any provision of a contract that violates Section 925 is voidable by the employee.  If a provision is rendered void at the request of the employee, the matter must be adjudicated in California and California law must govern the dispute.  In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.  The law applies to any contract entered into, modified, or extended on or after January 1, 2017.  Importantly, the statute excepts contracts with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement.

Recently, the Delaware Court of Chancery looked to Section 925 as a basis for enforcing a covenant not to compete in seeming contravention of California Business & Professions Code Section 16600.  The case, Nuvasive, Inc. v. Miles, C.A. No. 2017-0720-SG (Sept. 28, 2018), involved an employment agreement between an executive of a Delaware corporation that included a Delaware choice of law and forum provision even though the corporation was doing business, the executive resided, and the services were to be rendered in California.  The parties agreed that absent a choice of law provision, California law would apply to the agreement.  Although the employment agreement predated SB 925, Vice Chancellor Sam Glasscock III upheld the Delaware choice of law provision of the employment agreement:

"In Section 925, I find, the California legislature has stated strongly its general view that the prohibition of covenants not to compete (as well as other requirements of its labor law) cannot be evaded by choice of law provisions, but has made a policy decision that when contracting parties' rights are protected by representation, freedom of contract trumps this interest."

It remains to be seen whether the California courts will agree with Delaware.

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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...