Non-compete agreements are largely unenforceable in California. Therefore, employees who signed an employment contract with a non-compete agreement should still be able to lawfully work at a competing business without time- or geographic constraints.
In this article, our California employment attorneys discuss:
- 1. What is a non-compete agreement?
- 2. Are non-compete agreements enforceable in California?
- 3. Are there exceptions?
- 4. Can I be sued?
- 5. Are non-solicitation agreements different?
1. What is a non-compete agreement?
Also called a non-competition agreement, a non-compete agreement is where an employee of a company agrees not to compete with that company if the employee ever quits or is terminated. Non-compete agreements are usually found in an employment contract.
Typically, non-compete provisions spell out a specific time frame (such as a year) during which the former employee is prohibited from working for a competitor. And some non-compete clauses specify a geographic area where the former employee may not compete against the company.
The purpose of non-compete agreements is to make employees think twice about quitting since – if they do – they would be prohibited from working in the same profession for a significant period of time. Without non-compete agreements, employers risk putting time and expense into training workers only to have the workers leave and bring their skills to a competitor.
2. Are non-compete agreements enforceable in California?
No, non-compete agreements are usually unenforceable under California state law. By voiding non-compete agreements, California law promotes the public policy of people having the freedom and mobility to work where they want without fear of repercussion from their former employers.1
But even though non-compete agreements may carry no legal weight in California, employers often put them in employment agreements anyway. And not realizing they are void, employees may feel trapped in their jobs or may give up on their chosen profession altogether.
Note that many states do permit “reasonable” non-compete agreements in employment contracts. But California law forbids employers from using “choice-of-law provisions” to rope California employees into another state’s jurisdiction for non-compete purposes.2
Also note that the FTC (Federal Trade Commission) has moved to prohibit non-compete agreements completely. If implemented, this measure could be enforced later in 2023. Learn more.
3. Are there exceptions?
Non-compete agreements are permissible in California in the context of 1) selling a business, 2) partnerships, and 3) LLCs.
3.1. Sale of a business
When a business owner sells their business (or interest in the business), the seller and buyer can lawfully agree that the seller will not compete with the business in the same geographic area.3
Since the person selling the business is in a position of power (unlike employees at a company), California law permits sellers to enter into non-compete agreements with their buyers.
Whenever a business partner leaves a partnership, the parties can lawfully agree that the exiting partner will not carry on a similar business in the same geographic area.4
Since partners are on equal footing with each other (unlike employers and their workers), California law allows them to enter into non-compete agreements.
Whenever a member of a limited liability company (LLC) leaves the LLC, the parties can lawfully agree that the exiting member will not carry on a similar business in the same geographic area.5
Note that sometimes LLC members are also employees of the LLC. But California law will still enforce non-compete agreements so long as the terms are customized to the employee’s role as a member.
4. Can I be sued?
California employers may threaten to sue former workers who go on to compete with them. But their legal departments should already know that any judge will dismiss their case (unless one of the exceptions discussed above applies).
People who have been sued for violating a non-compete agreement should consult an attorney about filing a motion to dismiss the case right away.
5. Are non-solicitation agreements different?
Non-solicitation agreements prohibit a company’s former employees from then hiring (“poaching“) the company’s current employees. And like non-competition agreements, non-solicitation agreements are usually unenforceable under California law.6
(Note that California courts usually enforce non-disclosure agreements prohibiting former employees from revealing trade secrets, intellectual property, and other confidential information as long as the agreements are not overbroad.)
For legal advice and to discuss your rights with a labor law attorney, contact our employment law firm. Our employment lawyers have offices in Los Angeles and throughout the state of California.
- California Business and Professions Code section 16600 (“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.“). Attorney General Bonta Reminds Employers and Workers That Noncompete Agreements Are Not Enforceable Under California Law, California Attorney General (March 15, 2022).
- See, for example, Stryker Sales Corp. v. Zimmer Biomet, Inc., (United States District Court for the Eastern District of California, 2017) 231 F. Supp. 3d. (“16600 represents a fundamental public policy interest in California and that it should override contractual choice-of-law provisions at least with respect to such restrictive covenants.”). See also Power Integrations, Inc. v. De Lara (United States District Court for the Southern District of California, 2020) 2020 U.S. Dist. LEXIS 52724.
- 16601 PB – Sale of Goodwill or Corporate Shares (“Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.“)
- 16602 PB – Partnership arrangements (“Any partner may, upon or in anticipation of any of the circumstances described in subdivision (b), agree that he or she will not carry on a similar business within a specified geographic area where the partnership business has been transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from any such other member of the partnership, carries on a like business therein.“)
- 16602.5 PB – Agreement by member not to carry on similar business within specified locality (“Any member may, upon or in anticipation of a dissolution of, or the termination of his or her interest in, a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction recognizing such a series), agree that he or she or it will not carry on a similar business within a specified geographic area where the limited liability company business has been transacted, so long as any other member of the limited liability company, or any person deriving title to the business or its goodwill from any such other member of the limited liability company, carries on a like business therein.“).
- Edwards v. Arthur Andersen LLP (California Supreme Court, 2008) 44 Cal. 4th 937.