Enforceability of Non-compete Clauses in California

Employees and new businesses often must decide whether and how to handle non-compete agreements. If you are wondering whether a “non-compete” clause in an employment contract is enforceable, remember that you must consider both California statutes and case law on the subject.

What is a Non-compete Clause?

A non-compete clause, also referred to as a covenant not to compete, is a term in a contract in which one party agrees not to enter into or start a similar profession or trade in competition with the other party. Many contract disputes involve this clause, especially where the contract seeks to prevent an employee from working in a certain field or enterprise after leaving a particular employer in that particular field.

California Case Law and Non-compete Clauses

In California  there is a settled public policy favoring open competition.  Kelton v. Stravinski, 138 Cal. App. 4th 941, 946 (2006).  This means that courts will be guided by a policy that favors employees being able to seek employment after leaving their job to encourage competition for the betterment of the economy.

California Statute and Non-compete Clauses

Similarly, section 16600 of the California Business and Professions Code states that, with limited exceptions, contracts restraining individuals “from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

There are two exceptions where broad covenants not to compete are permitted, codified in sections 16601 and 16602 of the California Business and Professions Code, which provide that covenants not to compete are permitted where a person sells the goodwill of a business, or where a partner agrees not to compete in anticipation of dissolution of a partnership.  In the partnership example,  the statute is designed to prevent situations where one partner desires to abandon a partnership, take all the partnership’s clients, and start the same business over on his or her or its own with those clients.

Enforcing a Non-compete Clause

A non-compete clause will be enforced if it does not “circumvent California’s deeply rooted public policy favoring open competition,” meaning that the contract would have to fall within an exception to section 16600.  Even then, a non-compete clause may still be void if it is too broad or held to be a sham designed to evade the public policy against non-compete agreements.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and contract  claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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