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California Ban on Covenants Not To Compete

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What Are Covenants Not to Compete?

Covenants not to compete, or non-compete clauses, are often included in employment contracts. Non-compete clauses can be used to keep employees from working with the company’s competition upon leaving the company. Former employees may also be prohibited from informing the competition about the following:

  • Trade secrets
  • Product details
  • Marketing plans
  • Manufacturing processes
  • Clientele identities
  • Business techniques
  • Upcoming products.

What is California’s Ban on Non-Compete Covenants?

In most states, non-compete covenants are enforceable if they are reasonable in purpose and scope. “Reasonable” is determined differently by the jurisdiction and the industry. A general rule is that non-competes are likely valid if:

  1. The employer has important interests to be protected (business practices, marketing plans, etc.);
  2. The employee receives consideration (additional compensation) for signing the non-compete clause;
  3. The non-compete clause applies for a limited time (depends on the industry but usually not more than 2 years); and
  4. The non-compete clause only applies to a limited geographical region (where the employer operates).

However, under California law, non-compete clauses are generally void. Employment contracts may not be used to restrict an employee’s ability to work in an industry.  Also, employers cannot fire an employee for refusing to sign an employee contract with an unenforceable non-compete clause. In that case, the employer may be liable for wrongful termination.

What are Some of the Exceptions to California’s Ban?

California still allows covenants not to compete, but only in limited circumstances:

  • Non-compete agreements limited to duration of employment: In California, employers cannot put restrictions on an employee after they leave the company. However, employers can require employees to refrain from working with competitors during employment
  • Selling an entire business or goodwill of the business: Non-compete clauses are valid if part of an agreement to sell an entire business or the brand name of the business.
  • Dissolution of a partnership or leaving a partnership: When a partnership dissolves or a partner leaves, a non-compete agreement may be valid if it is reasonably limited in time and geography.

How Are Non-disclosure Agreements Different?

Non-disclosure clauses prevent employees from disclosing confidential business information. They are different from non-compete clauses in that they do not prevent employees from working for competitors. However, if the non-disclosure clause too closely resembles a non-compete clause or if it is overly broad, the court may still strike it down.

How Can a Lawyer Help?

An attorney may be vital in navigating California’s ban on anti-compete and non-solicitation clauses. California Employment lawyers can help review employment contracts to evaluate non-compete and non-disclosure clauses. An attorney may even be able to suggest alternatives to non-compete and non-disclosure agreements. On the other hand, if you have been terminated for refusing to sign a non-compete clause, speak to a skilled employment lawyer to see if any legal remedies are available to you.

Photo of page author John Kirby

, LegalMatch Legal Writer

Last Modified: 05-18-2018 02:06 AM PDT

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