A California Non-Compete Agreement can be an effective way for a business to protect its most valuable information. A non-compete agreement is a legal contract between an employer and an employee. It may affect what types of jobs the employee may accept after leaving the employer, and what types of company information the employee could use in future jobs.
Non-compete agreements are effective tools, but they are governed by the laws and statutes of each state. Every state has its own rules about what can and cannot be in a non-compete agreement. Below is a guide to what is allowed in California.
Is a Non-Compete Legally Enforceable in California?
California is one of the strictest states in the country regarding non-compete agreements. Technically, non-compete agreements are not enforceable in California [1] . 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 the term ‘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 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 – 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 thereafter. [3]
What’s Protected?
In California, the only thing that can be protected by non-compete agreements is trade secrets. That is a broad category, so it leaves plenty of reasons to use a non-compete agreement in the state. However, it is the only thing that can be included in an agreement. If the item does not fall under the umbrella of “trade secrets” it can’t be covered by non-compete agreements.
Reasonable Use and Exceptions
California does not have any defined reasonable use or exceptions. Non-competes are rare in California and 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 seller of a business can agree with the purchaser not to solicit employees of the business, but only if the agreement is limited to employees of the business 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 with regard to non-compete agreements.
Limitations on time
Generally, California courts prefer agreements to be three years or less. This isn’t set in stone and the agreement should be reasonable to the person’s position and the scope of the sensitive information. However, an agreement of three years or less has a greater likelihood of surviving a challenge in court.
Non-compete agreement California geographical limitations
California does not define geographical limitations on non-compete agreements. However, given that the state is not favorable toward non-compete agreements in the first place, it’s unwise to put broad geographical limitations in your non-compete agreements. Generally, agreements should be as narrow in scope as possible.
Blue Penciling
If a non-compete agreement is too broad or if the terms are unreasonable, California courts will not amend it. According to Kolani v. Gluska (1998) “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:
