Status of Noncompetition Agreements in California

by Allen M Lee4. February 2011 08:27

In many states, and still so today, contractual restraints on the practice of a profession, business or trade were generally considered valid so long as they were reasonably imposed. This was true in California until 1872, when the California legislature rejected the so-called rule of reasonableness by enacting legislation that made covenants not to compete void, subject to some exceptions.  Today, this statute is codified in Cal. Bus. & Prof. Code § 16600-16602.5, which states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Excluded from the scope of this prohibition are noncompetition agreements in the sale or dissolution of corporations (Cal. Civ. Code § 16601), partnerships (Id.; § 16602), and limited liability corporations (Id.,§ 16602.5). 

In the years since its enactment, California courts have generally condemned noncompetition agreements.  See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 123, fn. 12 (Cal. 2000) (stating that such restraints on trade are “largely illegal”). In this regard, California courts have consistently affirmed that Section 16600 evinces a settled legislative policy in favor of open competition and employee mobility.  Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 946 (Cal. 2008).  This law protects Californians and ensures “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 859 (Cal. Ct. App. 1994).  It protects “the important legal right of persons to engage in businesses and occupations of their choosing.”  Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1520 (Cal. Ct. App. 1997). 

More recently, in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, the California Supreme Court again reaffirmed that noncompete agreements are automatically void as a matter of law under Section 16600.  At issue in Edwards were two non-compete clauses.  The first prohibited the plaintiff accountant employee from performing professional services of the type he had provided while at his former firm for any client he had worked on in the 18 months prior to his separation from the firm.  The second clause prohibited the accountant, for a year after termination, from ‘soliciting,’ defined under the noncompete agreement as providing professional services to any client of the former employer’s Los Angeles office.  The Court held these provisions to be invalid because it restrained the employee’s ability to practice his profession.

Notably, in Edwards the Supreme Court rejected the limited or “narrow-restraint” exception to section 16600 followed by some federal courts, which excepted application of Section 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession.”  Under some interpretations of the narrow-restraint exception, only noncompetition agreements that completely restrained the employee from practicing his profession, trade, or business were void.

 

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

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