Many business contracts include clauses that restrain compensation, and when business partners or executives decide to leave a company, questions can arise about what exactly their non-compete agreement entails and whether it is enforceable.
Non-compete agreements are governed by California Business and Professions Code §16600. The statute 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.” However, there are exceptions to this rule, and it does not apply in certain situations to non-compete agreements in the sale or dissolution of corporations, partnerships and limited liability corporations.
California courts have interpreted the non-competition statute as reflecting a legislative policy in favor of open competition and employee mobility. The law protects California workers and ensures that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice. It protects the important legal right of persons to engage in businesses and occupations of their choosing. In finding that a non-competition agreement was invalid because it restrained an employee’s ability to practice his accounting profession, the court in Edwards v. Arthur Andersen LLP (2008) 44 Cal 4th 937, stated that it “generally condemns non-competition agreements.” This condemnation arises out of the theory that the interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers. See Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 575 (2009).
Non-compete agreements are regularly invalidated in cases where the employer is a professional with a specific set of skills. For instance, in Hill Med. Corp. v. Wycoff (2001) 86 Cal. App. 4th 895, a radiologist’s professional practice consisted solely of providing radiology services, so the non-competition agreement would effectively prevent him from practicing his trade. Therefore, the court ruled that the agreement was void.
Many employers argue that a non-compete agreement is necessary in order to protect their trade secrets. Indeed, where narrow restraints which prohibit employees from using confidential information taken from the former employer, the courts occasionally have held such provisions to be lawful. If, however, there is an outright prohibition on competition, the agreement will be void. See Hair Club for Men, LLC v. Elite Solutions Hair Alternatives, Inc., 2007 U.S. Dist. LEXIS 30167.
Furthermore, in fairly recent cases, the courts have questioned whether the protection of trade secrets is a valid exception to the rule against non-compete agreements. For example, in Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564,577 (2009), the court stated, that “…we doubt the continued viability of the common law trade secret exception to covenants not to compete”. In Richmond Techs, Inc. v. Aumtech Bus Solutions, 2011 U.S. Dist. LEXIS 71269, 60-61 (2011), the court ruled that non-solicitation and non-interference provisions in a non-disclosure agreement would likely be unenforceable under California law, considering that “[o]ther cases suggest that case law protecting trade secrets does not actually create an exception to Section 16600, but instead enables courts to enjoin the misuse of trade secrets as an independent wrong, either as a tort or a violation of the Unfair Competition Law.” The court ultimately ruled that the provisions would have the effect of restraining defendants from pursuing their chosen business and professions if enforced.
As stated previously, the statute does not apply in certain circumstances to the sale of corporations, partnerships, and LLCs. The exception serves an important commercial purpose by protecting the value of the business acquired by the buyer. In certain limited cases involving the sale of the goodwill of a business, it is unfair for the seller to then engage in competition with his old business, which will diminish the value of the asset that he sold. Therefore, the exception is meant to permit the purchaser of a business to protect itself against competition from the seller which would reduce the value of the property right he acquired. In such cases, the non-compete agreement is a material part of the purchase and sale of the business and is intended to protect the business’ goodwill, for which the seller received compensation as part of the transaction. The limitations applied by these exceptions must still not circumvent California’s deeply rooted public policy favoring open competition. The non-compete portion of the sales contract must clearly state that it falls within the limited exception, and the practical effect of the transaction and the economic realities must be considered.
The Boesch Law Group has considerable experience dealing with non-compete agreements, both in pre-litigation negotiation and mediation and in litigation. Whether you are an employee who has signed a non-compete agreement or an employer trying to enforce one, you should consult with an experienced attorney who can advise you as to the latest developments in the law and how they may apply to your situation. Our Los Angeles business attorneys are highly skilled in this area and can advise you of your rights. Call today for a free consultation: (310) 578-7880.
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