Non-Competition Agreements in California – A Frequent Source of Business Disputes

At Buffington Law Firm, our Orange County business litigation attorneys are experienced at advising parties and handling lawsuits involving non-competition agreements and similar issues. If you are involved in such a business dispute, contact us today for a free legal consultation

Background. It is very common in California and other states for employers to include a “non-competition provision” in an employment contract or letter of employment. This is particularly common in employment letters and contracts involving senior executives and salespersons. Usually these provisions will contain language that purports to prohibit the employee from competing against his or her employer for a specified time (usually 1-4 years) within a specified geographical area, e.g. “Orange and Los Angeles County Area,” “Southern California” etc. Employees often assume, once they leave the company, that these provisions prevent them from engaging in their trade or business within these parameters. After all, it is in the contract that the employee signed, that was surely written by a lawyer! Employers also sometimes believe that non-competition agreements are enforceable.

In fact, these provisions are usually legal nullities in California. California Business and Professions Code Section 16600 et seq. specifically provides, in simple language: ” 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.” [Bus. & Prof. Code Sec. 16600]. Put simply, this language invalidates most non-competition clauses altogether. In this respect California is quite different than many other states. Washington State, for example, is notorious for allowing and enforcing non-competition agreements.

The one main exception to California’s invalidation of non-competition agreements arises when the sale of a business takes place. Business and Professions Codes Section 16601-16602.5 make an exception in the context of the sale of a business, partnership, or LLC interest. The notion here is that the buyer of the business can contract with the seller not to compete with the buyer for a reasonable time and within a reasonable geographic area. The idea is that many sellers would not buy the business if such purchase involved the prospect of competing with the seller, who is usually much better-known in the trade than the buyer. So this exception benefits both seller and buyer. Naturally, this exception does not apply in the usual context where an executive is simply terminating his or her employment for whatever other reason.

Traps for the Unwary. Buffington Law Firm‘s Orange County business litigation attorneys have successfully handled many lawsuits dealing with departing employees and executives. California’s rejection of non-competition agreements is straightforward in most respects. However, when an employee or executive plans to quit and compete there are some pitfalls. The most important caveat is that the employee must be careful not to engage in Unfair Competition against the employer. The most common form of unfair competition involves misappropriation of the employer’s intangible assets. A departing employee has no right to start using the former employer’s trade secrets or commercial confidential information that the employee obtained during employment.

An employee who is planning to exit employment must be careful what acts he or she takes before actually quitting to compete against the employer. While employed the executive has a continuing duty of loyalty to the employer and breach of this duty can result in a lawsuit.

There are other pitfalls to consider. We recommend that you set up a free consultation with one of our experienced business litigation attorneys without delay!