California’s Take on Non-Compete Agreements

It is a common refrain by executives, managers, and employees generally: Can my former employer really enforce the non-competition agreement I signed when I first joined the company? The answer, as is often the case in the legal realm, is yes, no and maybe.

California, unlike many other states, has laws against “restraint of trade.” In the case of a person who leaves a company, Business & Professions Code Section 16600 provides 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.” That is, if you signed a contract which states you will not work in competition with your former employer once you leave its employ, the law regards it as void and unenforceable.

However, there are important exceptions. For one, if you owned a significant amount of shares in your former company, Section 16601 states that you may be prohibited from competing for a period of time and within a reasonable geographic region if the shares you sold include the “goodwill” of the business.

Another important exception is where the non-compete agreement prohibits the employee from competing through the use of its trade secrets. It will not constitute a restraint of trade if the former employer binds you to a contract that prevents you from using the trade secrets you acquired while you were employed.

The law against restraint of trade is not meant to favor employees only against the interests of employers. Rather, California has long ago determined that the free market economy is advanced when employees can move freely from one job to another and in turn, employers benefit by being able to hire the best employees even if they were employed by a competitor. Given how successful California’s economy has been not only in relation to the other states, but throughout the world, it is hard to dispute the logic behind the restraint of trade laws.