June 19, 2024

Obligate Law

Professional Law Makers

Understanding California’s Unique Non-Compete Law

2 min read
Understanding California’s Unique Non-Compete Law

Non-Compete Legal Issues in General

In almost all states the general policy is that a non-compete, a contractual term that restricts a person’s capacity to be employed in certain places, areas, or fields, post employment is against state policy.

However, “reasonable” non-compete contracts are enforceable if they serve to protect something valuable. Typically, this is secret information belonging to the former employer.

The exception ends of swallowing the rule as a company can always find a “good” reason why a former employee should not work for a competitor.

Additionally, the exorbitant cost of litigation often precludes the employee from ever challenging the propriety of a non-compete.

California Non-Competition Law is Distinct

California takes a distinct course of action. There is a longstanding public policy against employee restraints on trade. That policy is now also enacted in Business and Professions Code Section 16600, which makes illegal any employment restraints.

In other laws there are exceptions for business owners, but the ban against non-compete agreements for employees is a bright line rule.

In California, the issue of “reasonableness” is not an issue. Any restraint is void. Whether it be a type of work restraint, a geographic restraint, a bar against working for rivals, a time restraint, a financial penalty for working for competitors and so on.

Also,, unlike other states California has comprehensively discredited what is known as the “inevitable disclosure doctrine.” The concept here is that some employees will “inevitably” spill business owner secrets if they get to work for a competitor. In many states this can be a reason for enforcing a non-competition agreement. In California it is irrelevant.

Protecting Confidential data

California, though, has enacted the Uniform Trade Secrets Act. So while a former employee is not prevented from being employed by a rival, they do face trouble if in fact they do disclose their former employer’s confidential information or trade secrets.

National Effects

Since numerous national companies are not aware that California law differs from their state, and other states, situations come along where a non-compete contract entered into in one state is sought to be applied to an employee who has moved to California.

California courts have regularly stated that whatever restrictions are enforced in other states “stop at the border”. This is to preserve California state policy, as well as California employers who are not party to the non-competition contract.

The benchmark California case is Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, which refused enforcement of a Maryland non-compete contract entered in Maryland between a Maryland business and a then Maryland employee. The ex employee moved to California and was thus able to get out from under the agreement’s restrictions.

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