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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