Reminders Regarding Non-competition Agreements in California
On May 4 and May 13, 2017, the New York Times published an op-ed and article in which the authors asserted—in support of arguments disfavoring non-competition agreements—that California voids all non-competition agreements.* This is an overstatement of California law, which generally prohibits non-competition agreements in the employment context, but narrow exceptions do exist:
- Sale of a business. When a business owner sells the “goodwill of the business” or otherwise sells his or her ownership stake, the parties may agree to restrict the seller’s ability to compete with the buyer in the same geographic area where the business operates. (Cal. Bus. & Prof. Code § 16601). This is true in the context of a sale even (and especially) when the seller becomes an employee of the buyer.
- Dissolution/termination of a partnership. When a partner sells or otherwise disposes of his or her partnership interest in a partnership, the parties may agree to restrict the seller’s ability to compete within the same geographic area where the partnership is located, so long as part of the consideration provided to the selling partner is for his or her share of the “goodwill” of the partnership. (Cal. Bus. & Prof. Code § 16602)
- Dissolution/termination of a Limited Liability Company (LLC). When a member of an LLC sells or otherwise disposes of his or her interest in the LLC, the parties may agree to restrict the seller’s ability to compete within the same geographic area where the LLC is located, so long as part of the consideration provided to the selling partner is for his or her share of the “goodwill” of the LLC. (Cal. Bus. & Prof. Code § 16602.5)
- Protection of trade secrets. Companies may restrict an employee’s (or former employee’s) ability to use its trade secrets. Whether a company can use a non-competition agreement to do so, however, is a much murkier proposition under California law. A company would be required to demonstrate that a non-competition clause is “necessary” to protect the trade secrets at issue, which most California courts decline to find. In addition, other statutes protect trade secrets (e.g., the Uniform Trade Secrets Act, the Defense of Trade Secrets Act, certain non-solicitation provisions) and are likely a more successful tool to accomplish this important goal.
Non-competition agreements are narrowly enforced and strictly interpreted against employers in California. Employers who wish to make use of such agreements should consult with their Polsinelli labor and employment attorney when considering whether to draft non-competition agreements. Employers should also consider other restrictive covenants when seeking to protect company intellectual property, including non-solicitation of customers, which may be more enforceable in California employment agreements or severance documents.
*Non-competition agreement is a restrictive covenant to prevent employees from leaving their current employer to go to work for the employer’s competitor.