The non-compete clauses that many employers make their employees sign upon hiring have been consistently held to be invalid and unenforceable under most circumstances, because California law has a general policy of discouraging unreasonable restraints on trade, and encouraging healthy competition.
There seems to be a confusion, however, between non-compete and non-solicitation agreements which are distinct and different kinds of contract. The non-compete agreement usually provides that an employee may not engage in the same business as the employer is engaged in, within a certain locality for a certain period of time. The non-solicitation agreement, on the other hand, typically provides that the employee who is leaving the company to not solicit his services to his employer's current or past clients. Unlike non-compete agreements, the non-solicitation agreements are usually upheld and rightfully so. The law does not permit interfering with existing business that took a long time and much effort to build by "stealing" clients.
It is important, however, to understand what the term "solicitation" means. To solicit in the employment law context means "to actively seek business." The key term is "actively." The non-solicitation agreement may only prohibit the employee's initiation and active pursuit of the business of client of his former employer. The law does not require employee or new employer to refuse to provide services to clients who independently initiate contact and invite the employee to provide them with services. Aetna Bldg. Maintenance Co. v. West (1952) 39 Cal.2d 198. In that case, the California Supreme Court noted that merely informing customers of a change of employment without more is not solicitation and the willingness to discuss business upon invitation of another party does not constitute solicitation.
General Rules and Limitations Regarding Non-Compete Agreements
Under California Business and Professions Code section 16600, any agreement entered into with the purpose of limiting trade or business of any kind is to that extent void and unenforceable. California courts have consistently declared this provision an expression of public policy to ensure that citizens shall retain the right to purpose any lawful employment and enterprise of their choice. The interest of employees in their own mobility and betterment are deemed paramount to the competitive business interests of employers.
This means that despite having agreed not to compete, a former employee has the right to enter into competition with his former employer, even for the business of those who had formerly been customers of the former employer. It makes no difference that the covenant not to compete is reasonably limited in time and geographic scope.
In one case, an employment agreement provided in part: “Employee will not render services, directly or indirectly, for a period of one year after separation of employment with Employer to any person or entity in connection with any “competing product.” This agreement was held to violate Bus. & Prof. C. section 16600 and was therefore found void and unenforceable.
Parties cannot avoid the above section by including provision designating another state’s law as governing their employment agreement.
The only limitation is that the former employee’s competition must be fairly and legally conducted. Thus, disclosure of former employer’s trade secrets of other confidentially information may be regarded as unfair competition.
The only times when covenants not to compete are upheld are when the restrained imposed is narrow in scope, leaving a substantial portion of the market available to the employee. Thus, a covenant not to solicit to specific customers was one held valid because it limited access only to a “narrow segment” of the relevant market.
The Sale of Business Exception
Non-compete agreements may be enforceable when give by anyone selling the goodwill of a business. The seller of a business and its goodwill may agree to refrain from carrying on a similar business within a specified county or counties, city or cities, or a part thereof, so long as the buyer or any person deriving title to the good will carries on a like business therein.
There are several requirements that must be satisfied in order for such an agreement to be valid. First, a covenant not to compete must be reasonable in scope. The covenant must be shown to be reasonable and necessary to protect the business buyer’s interest in terms of duration, activity and territory. Secondly, the duration of time for which the given agreement not to compete prohibits competition is also a factor in determine the reasonableness of such an agreement. In other words, the shorter the period of time for which an agreement limits competition, the more likely such an agreement to be valid and enforceable.
Interestingly enough, covenants not to compete given in connection with the sale of business or partnership interest may be reformed by the court if unreasonable in scope. This means that the court may edit those portions of the agreement that are unreasonable and enforce the covenant only to the extent that it is deemed reasonable. At the same time, the courts will not reform a broad, illegal covenant not to compete into one that merely bars theft or confidential customer information.