A California Non-Compete Agreement is a legal contract between an employer and an employee to protect business information. It may affect what types of jobs the employee may accept after leaving the employer and what company information the employee could use in future employment.
In California, the only thing non-compete agreements can protect is trade secrets. That broad category leaves plenty of reasons to use a non-compete agreement in the state. However, it is the only thing that can be included in a contract. If the item does not fall under the “trade secrets” umbrella, a noncompete can’t cover it.
Is a Non-Compete Legally Enforceable in California?
Technically, non-compete agreements are not enforceable in California [1] . California is one of the strictest states in the country regarding non-compete agreements. However, there are specific instances in which they are allowed.
A California non-compete agreement is enforceable to:
- Seller of goodwill of a business – A non-compete is enforceable against a seller that sells the goodwill of a business, but they must agree to sell to a buyer that carries on the business therein. BPC § 16601 states the seller must “refrain from carrying on a similar business within a specified geographic area in which the business is so sold.” You must use ‘goodwill’ in a purchase agreement or non-compete.
- Partners involved in the dissolution of a partnership – When dissolving a partnership, the partners can agree to sign a non-compete to prevent one another from starting a similar business in the same area. In this case, specific geographical and time durations must be detailed. [2]
A California non-compete agreement is not enforceable to:
- Employees – According to BPC § 16600, “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
- Remote workers – A company based in California cannot get around state law by attempting to use the laws of the state the remote worker is based in. Remote workers working for a California company have the same protections as a California resident.
- Independent contractors – fall under the same category as employees under the statute and are ineligible to enter into a non-compete.
Penalties
Employers can be penalized for including a non-compete clause in an ineligible employee’s employment contract. If the person employs one or more employees, the civil penalty is $100 for each pay period for the initial violation and $200 for each pay period after that. [3]
Reasonable Use and Exceptions
California does not have any defined reasonable use or exceptions. Non-competes are rare in California; therefore, there is little established court history of what is and is not approved in the state as reasonable use.
You should also keep in mind the following FAQs:
Enforceable when terminated without cause? – Not decided.
Employee non-solicitation agreement permitted? – Split in case law, but a business seller can agree with the purchaser not to solicit employees of the business, but only if the agreement is limited to business employees at the time it was sold. [4]
Customer non-solicitation agreements permitted? – No
Does continuing employment equal sufficient consideration? – No
Non-Compete Agreement California Limitations
There are several limitations in California regarding non-compete agreements.
Time Limitations
Generally, California courts prefer agreements to be three years or less, and it is more likely to survive a challenge in court. This isn’t set in stone, and the period should be reasonable to the person’s position and the scope of the sensitive information.
Geographical Limitations
California does not define geographical limitations on non-compete agreements. However, given that the state is not favorable toward them in the first place, it’s unwise to put broad geographical limitations in your non-compete. Generally, they should be as narrow in scope as possible.
Blue Penciling
If a non-compete agreement is too broad or the terms are unreasonable, California courts will not amend it. Kolani v. Gluska (1998) states, “Courts reform contracts only where the parties have made a mistake, and not for the purpose of saving an illegal contract.”
California Non-Compete Agreement Sample
Download a California Non-Compete Agreement template here:
