Understanding Non-Compete and Non-Solicitation Agreements in California

Overview

California has one of the strongest public policies in the United States against restrictions on employee mobility. Unlike most other states, California generally prohibits non-compete agreements, and recent legislation has further strengthened these protections. This policy reflects the state's longstanding commitment - dating back to the original enactment of Business and Professions Code Section 16600 in 1872 - to the principle that every person should be free to engage in any lawful profession, trade, or business.

This guide provides a general overview of California's laws regarding non-compete and non-solicitation agreements. It does not constitute legal advice.

The General Rule: Non-Competes Are Void

Business and Professions Code Section 16600 provides:

"Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

California courts have consistently interpreted this provision broadly. In Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, the California Supreme Court held that Section 16600 prohibits non-compete agreements except in the narrow statutory exceptions described below. The court rejected the "narrow restraint" doctrine - which would have allowed non-compete provisions that imposed only partial restrictions on competition - holding that Section 16600 invalidates any agreement that restrains a person from engaging in a lawful business or profession.

Statutory Exceptions

Section 16600 recognizes limited exceptions, which are narrowly construed:

Sale of a Business (Section 16601)

A person who sells the goodwill of a business, or an owner's interest in a business entity, may agree not to compete with the buyer within a specified geographic area for a reasonable period. This exception applies only in the context of a bona fide sale of a business or ownership interest.

Dissolution of a Partnership (Section 16602)

Partners may agree that some or all of the partners will not compete within a specified geographic area upon dissolution of the partnership.

Dissolution or Sale of an LLC (Section 16602.5)

Members of a limited liability company may agree to similar restrictions upon the dissolution of, or sale of, the LLC.

These exceptions are strictly limited to the specific contexts described and do not extend to ordinary employment relationships.

Recent Legislative Developments

AB 1076 (Effective January 1, 2024)

AB 1076 codified existing case law by amending Section 16600 to expressly state that it applies regardless of whether the contract was signed or the employment was maintained outside of California. This addressed attempts by out-of-state employers to enforce non-compete agreements against employees who live or work in California.

SB 699 (Effective January 1, 2024)

SB 699 further strengthened California's prohibition by making it unlawful for an employer to:

• Enter into or attempt to enforce a non-compete agreement that is void under Section 16600
• Require an employee to sign a non-compete agreement that is void under Section 16600

SB 699 applies regardless of where and when the agreement was signed. It also creates a private right of action, allowing employees to bring lawsuits against employers who violate the statute and to recover actual damages, injunctive relief, and reasonable attorneys' fees.

Notification Requirement

Under AB 1076, employers were required to individually notify current and former employees (employed after January 1, 2022) by February 14, 2024, that any non-compete clause or agreement that violates Section 16600 is void. Failure to provide this notification may itself constitute a violation of law.

Non-Solicitation Agreements

Non-solicitation agreements - which restrict a former employee from soliciting the employer's customers, clients, or employees - occupy a more nuanced legal position in California.

Customer Non-Solicitation

California courts have generally found that customer non-solicitation agreements that effectively function as non-compete agreements are unenforceable under Section 16600. In The Retirement Group v. Galante (2009) 176 Cal.App.4th 1226, the court invalidated a customer non-solicitation provision on the grounds that it restricted the former employee's ability to practice their profession.

However, employers may still have remedies through trade secret law if a former employee uses the employer's confidential customer lists or proprietary information to solicit business.

Employee Non-Solicitation

Agreements that prohibit former employees from soliciting or recruiting the employer's current employees are also subject to scrutiny under Section 16600, though the case law in this area is less settled.

Trade Secrets and Confidentiality Agreements

While non-compete agreements are generally void, California law does protect employers' legitimate trade secrets and confidential information. The California Uniform Trade Secrets Act (CUTSA), codified at Civil Code Sections 3426 - 3426.11, provides remedies for the misappropriation of trade secrets.

Employers may lawfully require employees to sign confidentiality and non-disclosure agreements that protect trade secrets and proprietary information. However, these agreements cannot be so broad as to function as de facto non-compete agreements.

The distinction between protecting trade secrets and restraining competition can be subtle. An agreement that prevents an employee from working for a competitor altogether is likely an unenforceable non-compete, whereas an agreement that prevents the employee from using or disclosing specific trade secrets at a new employer may be enforceable.

What About Agreements Signed in Other States?

California's prohibition on non-compete agreements applies to employees who work in California, even if the agreement was signed in another state or the employer is based in another state. SB 699 and AB 1076 expressly address this issue, making clear that California law governs regardless of the agreement's choice-of-law provision.

However, the enforceability of non-compete agreements for California residents who work entirely outside of California, or for employees who relocate out of California, may involve more complex choice-of-law issues.

Consequences for Employers

Employers who enter into, maintain, or attempt to enforce non-compete agreements in violation of California law may face:

• A private lawsuit by the employee seeking damages, injunctive relief, and attorneys' fees under SB 699
• A claim for unfair business practices under Business and Professions Code Section 17200
• Potential liability for wrongful termination or retaliation if an employee is terminated for refusing to sign an unenforceable non-compete

Practical Considerations

For employees, the key takeaway is that non-compete agreements are generally unenforceable in California. However, employees should be aware that obligations regarding trade secrets and confidential information remain valid and enforceable.

For employers, protecting legitimate business interests in California generally requires reliance on confidentiality agreements, trade secret protections, and intellectual property assignments rather than non-compete provisions.

Conclusion

California's prohibition on non-compete agreements is broad, well-established, and has been significantly reinforced by recent legislation. Both employees and employers benefit from understanding the scope of these protections and the limited exceptions that exist. Individuals with questions about a specific non-compete or non-solicitation agreement are encouraged to consult with a qualified employment law attorney.

This guide is provided for general informational and educational purposes only. It does not constitute legal advice, and no attorney-client relationship is created by reading this material. Laws and regulations may change, and the application of law depends on the specific facts of each situation. Consult a qualified attorney for advice regarding your particular circumstances.