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Corporate Law Blog Post

Non-Competes Are Non-Existent in California

After watching employees and trade secrets go to competitors, employers understandably demand new and existing employees sign non-compete agreements. Essentially, these are separate contracts or clauses within employment agreements requiring the employee to promise to not work for a competitor for a defined period after leaving the company. In most jurisdictions, non-compete agreements are permitted with various restrictions. California does not enforce them against employees, except in extremely rare circumstances.

California law says

With a broad stroke, the California Business and Professions Code states that any contract that limits citizens from engaging in a lawful profession, business or trade of any kind is void. In other words, non-compete clauses are statutorily against the law in California. 

California law does provide an exception to the general prohibition of non-compete clauses — persons who are selling the goodwill of a business may agree to refrain from carrying on a similar business. Courts interpreting this exception have said that such sales transactions must clearly state the exception is applicable for it to operate. 

Post-employment non-competes are invalid

Michael Maas, an employee of Crave Entertainment Group (Crave), sold his stock to Handleman Company (Handleman), during its acquisition of Crave. Maas signed two documents with Handleman ― a stock purchase agreement that contained a three-year non-compete covenant and an employment agreement which included a one-year non-compete clause. Three years later, Maas left the company. Approximately six months after his resignation, he began working for a competitor.  California's Court of Appeals permitted the non-compete covenant in the stock purchase agreement under the statutory goodwill sales exception. However, the court said that the one-year non-compete clause in the employment agreement was void because it restricted Maas' pursuit of his profession.

How can a California employer protect itself?

With almost no legal options to protect its employees from leaving to a competitor, California employers have to be resourceful to protect their interests. Some of the ways in which companies can protect their interests include: 

  • Requiring strong confidentiality and invention assignment agreements
  • Executing strong entrance and exit interviews
  • Promoting company-wide programs to develop a culture of confidentiality
  • Creating effective trade secret protections 

While these methods do not prevent an employee from exiting to a competitor, they may help dissuade someone from doing it. 

If you are a California worker facing the enforcement of a non-compete agreement, consult with a San Jose corporate attorney to determine its validity.

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Creech Liebow & Kraus
333 West San Carlos Street, Suite 1600
San Jose, California, 95110-2726 USA