What You Need to Know About California Non-Compete Law
New California Noncompete Law for 2017
Background: A member of the California legislature requested that one of our attorneys provide information about the abuse of noncompete agreements.
Extensive information was provided about tactics being used by out-of-state companies to try and circumvent California's noncompete law and the impact upon California employees. An unfairness in the law was noted which harmed California businesses seeking to compete against national and out-of-state competitors.
Our attorney proposed a remedy to protect California employees and employers from abusive noncompete terms and litigation tactics.
We are very proud to announce effective January 1, 2017, that remedy will now be part of California law:
As of January 1, 2017, for contracts "entered into, modified, or extended" after that date:
- Employment contract terms for California employees which require disputes to be decided outside of California can be voided by the employee.
- Employment contract terms for California employees which have illegal noncompete terms can be voided by the employee. (This was already the law, but now there is additional employee protection.)
- Only California courts will decide disputes about these issues.
- Only California law will be applied when deciding these issues.
(Note: It remains to be seen what courts outside of California, or federal courts, will do if a company sues an employee outside of California state court. But no matter what is in the employment contract the employee has the right to also sue in California.)
- If an employee has to go to court to enforce their rights the court can award attorney fees to the employee. No attorney fees can be awarded to the employer per this law, even if the employer wins a dispute. (Note: there may be an attorneys fees provision in the contract which could award fees to whoever wins a dispute.)
- The law applies to contracts requiring disputes to be decided in court or by arbitration. (Note: There will be legal challenges to applying the law to arbitration agreements.)
- The law does not apply if the employee was represented by an attorney and negotiated terms permitting the law of another state to apply, or for disputes to be decided in another state.
- The law does not apply to independent contractors.
- The law may not apply to contracts entered into before 2017.
What You Will Find on this Website
The most complete review of California noncompete law on the Internet.
Overview of the Law
In California restraints on trade, aka non-compete agreements, are illegal and void for employees and independent contractors.
The three main types of restrictions are (1) a true noncompete where an employee cannot work somewhere, (2) a non-solicitation of customers restriction, and (3) and non-solicitation of employees restriction.
HOWEVER, there are related laws which are enforceable which can made a contract analysis complex.
Do not assume a 'noncompete being illegal' means you are free to do what you want or a former employer cannot make your life miserable. That can be a costly mistake.
Certain restrictions are valid for business owners.
Although these rules are, and should be easy to understand, many businesses (and attorneys) remain unaware of California law.
I am Looking for a California Non-Compete Form for My Employees
Non-compete agreements for employees and independent contractors are illegal in California.
That does not mean a business cannot protect its confidential information and trade secrets.
Are Any Non Compete Agreements Legal in California?
Only for owners of a business, corporation, LLC, or partnership.
If you sell your ownership in a business you can be prevented from turning around and soliciting your former customers and taking them from the business you sold.
This is to protect the goodwill and value of the business the buyer is purchasing.
Related restrictions such as protecting trade secrets can be enforceable.
How is California Law Different From Other States?
In most states a "reasonable" noncompete is valid and enforceable. This can create a difficult, uncertain, and expensive proposition for employees and employers because they do not know if a non compete is enforceable or not without going through an expensive lawsuit.
In California it is a bright-line rule: Employee noncompete agreements are void. It does not matter how reasonable or well-intended they are.
Can I be Fired if I Do Not Sign a Non-Compete?
Not lawfully. If you are fired for refusing to sign a non-compete agreement you have been wrongfully terminated. Your damages may include lost wages and punitive damages.
Before refusing to sign a non-compete have it reviewed by an attorney. Not every contract labeled 'non-compete' is really a noncompete. You do not want to be fired only to find out you do not have any recourse.
The leading case is D'Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927. That court held an employer cannot lawfully require an employee to sign an employment contract which includes as a term an illegal covenant not to compete.
The rule applies even if other parts of the contract are enforceable.
If the employer terminates an employee who refuses to sign such an agreement they may be liable for wrongful termination in violation of public policy.
What if My New Employer Lets Me Go Because My Old Employer Says I Have a NonCompete?
You have a wrongful termination claim against your new employer. You may also have an interference with contract claim against your former employer.
In Silguero v. Creteguard, Inc. (2010) 187 Cal.App.4th 60, an employee had an illegal non-compete agreement with her employer which prevented her from engaging in any sales activity post-employment for 18 months.
After she left she joined a new company. Her old employer told her new employer that she had a noncompete. Out of respect for her old employer, her new employer fired her.
The court held she had a wrongful termination claim against her new employer because her new employer was in effect enforcing an illegal contract that is against California public policy.
If I am an Employee Can I Simply Sign a Non-Compete Knowing it is Unenforceable?
Maybe. If you are certain any legal dispute can only be decided in California this may be a simple option.
The biggest problem for many employees is understanding numerous laws may be implicated, not just the California noncopete law.
If the employer has included a term letting it sue you in a different state then your situation is not as simple as signing a contract to keep your job, knowing it cannot be used against you.
Can I not be Hired if I Do Not Sign a Non-Compte?
The same law applies as if you were employed and were fired for not signing an illegal noncompete.
If a Non Compete is Illegal Does That Mean I Can Solicit My Former Employer's Customers?
Not necessarily. In fact, to be safe assume the answer is no.
There are two different legal issues: one is the noncompete and the other is trade secret law.
Just because a noncompete is illegal in California does not mean an employer does not have trade secrets.
If you take a customer list and use it to solicit for a new business or employer you may be misappropriating your former employer's trade secrets.
Is there a Trade Secret Exception to NonCompetes?
No. Any attorney who tells you that should be your ex-attorney.
An employee can be prohibited from using trade secret and confidential information. For example, they can be prohibited from using a confidential customer list to solicit customers.
But the claimed protection of trade secrets cannot be used to impose a noncompete.
There is no lawful non-compete in California to protect trade secrets.
This type of argument about some trade secret "exception" to noncompetes has been repeatedly rejected by the courts. Recently, in Dowell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564.
The Dowell court also noted a court can decide if a non-compete is illegal as a matter of law without even needing to look at trade secret issues.
What is a Legal Trade Secrets Term that is Not a Void Non Compete?
A contract term saying an employee cannot solicit customers for 12 months post-employment is an illegal noncompete.
A contract term saying an employee cannot use confidential company information to solicit customers post-employment is a valid protection of company information. This allows a former employee to compete, so long as they are not using confidential information.
What if I Know a Former Employee Will Use Confidential Information in Their New Job?
A non-compete is still illegal to prevent what you believe will happen in the future.
Unlike other states, California has completely rejected the "inevitable disclosure doctrine." This means a non-compete cannot be enforced to prevent someone from taking a job because you believe they will use your confidences as part of that job. Instead, you have to prove the former employee has actually misappropriated your confidential information in their new employment.
The leading case on this issue is Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443.
What if an Arbitrator Enforces a NonCompete?
Some employment contracts require any disputes to be decided by binding arbitration. If an arbitrator upholds an illegal non-compete term assume the arbitrator's decision cannot be reversed by a court.
The rule that arbitration is final often trumps the correctness of the arbitrator's ruling.
In Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401, this situation happened. An arbitrator in New Jersey decided New Jersey rules would apply and held a non-compete in California was valid. The general rule is that an arbitrator's ruling cannot reversed by a court simply because it is wrong. Otherwise, the losing party in arbitration would always appeal to the court. This would eliminate the benefits of arbitration.
What if My Non-Compete Refers to the Law of Another State?
Some multi-state employers try to force California residents to litigate employment disputes in far aware locations. Typically, where the employer's main office is located.
This presents an often, unavoidably difficult situation with many possible complexities.
Initially, no matter what your employment contract states the terms of employment for California employees are governed by California law. For instance, overtime rules, minimum wage, workers compensation rights, etc., are governed by California law even if your employment agreement refers to the law of another state.
Additionally, California public policy prohibiting non compete terms cannot be waived.
Complexities arise when an employer makes use of the contract term and files a lawsuit in another state to enforce a noncompete. Assuming a judge in another state rules the non-compete is enforceable, is that ruling enforceable in California?
In my experience trial judges say no. However, there is no definitive appellate ruling on the topic so the law is unsettled.
For money claims an out of state order would be enforced. For example, if you incurred a debt while in Las Vegas to a casino, a money judgment in Nevada would be enforced in California.
But non-competes are a different matter involving California public policy. A judge in one state does not have the authority to dictate public policy in another state. And the situation almost always involves a California business that is not a party to the non compete - your new employer - which is to your benefit, as California law will protect their ability to hire you.
Potential out of state litigation creates an expense and potential uncertain outcomes.
If you are a California employee faced with signing a contract permitting litigation out of state, you should have the situation professionally reviewed. Keep in mind if you are fired or not hired due to not signing a contract with an illegal non-compete term you may have rights to sue in California for wrongful termination.
Does California Law Protect Employees in Other States?
Usually no. For example, if you are a Florida resident working in Florida for a business headquartered in Los Angeles, your non-compete will most likely be decided by Florida law.
If, in this example, your non-compete agreement refers to California law applying, then there is a good chance California law would nullify the noncompete.
Keep in mind I am only licensed in California and most familiar with California law. A local attorney may be able to better analyze your situation per the law of your state.
More Useful Cases
The Retirement Group v. Galante (2009) 176 Cal.App.4th 1226
The Retirement Group alleged that a number of former associates had started their own competing business and had misappropriated customer lists to solicit customers for their new business.
The trial court granted a preliminary injunction prohibiting the former associates from soliciting The Retirement Group's customers and transferring their accounts to their new business.
The court of appeal reversed the ruling of the trial court.
The trial court could prohibit the former associates from using customer lists and misappropriating trade secrets to solicit customers. However, the court could not issue a blanket prohibition on solicitation as that would violate Business & Professions Code § 16600. The former associates could solicit customers, as any competitor, if non-confidential information was used.
Can I Read California's Law for Myself?
California Business & Professions Code § 16600 - Outlawing Employee NonCompetes:
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.
California Business & Professions Code § 16601 - Allowing NonCompetes for Business Owners:
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.
For the purposes of this section, "business entity" means any partnership (including a limited partnership or a limited liability partnership), limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction that recognizes such a series), or corporation.
For the purposes of this section, "owner of a business entity" means any partner, in the case of a business entity that is a partnership (including a limited partnership or a limited liability partnership), or any member, in the case of a business entity that is a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction that recognizes such a series), or any owner of capital stock, in the case of a business entity that is a corporation.
For the purposes of this section, "ownership interest" means a partnership interest, in the case of a business entity that is a partnership (including a limited partnership a limited liability partnership), a membership interest, in the case of a business entity that is a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction that recognizes such a series), or a capital stockholder, in the case of a business entity that is a corporation.
For the purposes of this section, "subsidiary" means any business entity over which the selling business entity has voting control or from which the selling business entity has a right to receive a majority share of distributions upon dissolution or other liquidation of the business entity (or has both voting control and a right to receive these distributions.)
California Business & Professions Code § 16602 - Additional Rules for Partnerships:
(a) 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.
(b) Subdivision (a) applies to either of the following circumstances:
(1) A dissolution of the partnership.
(2) Dissociation of the partner from the partnership.
California Business & Professions Code § 16602.5 - Additional Rules for LLCs:
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.
California Labor Code § 925 - New 2017 Law:
(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
(1) Require the employee to adjudicate outside of California a claim arising in California.
(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.
(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney's fees.
(d) For purposes of this section, adjudication includes litigation and arbitration.
(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.
(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.
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