Under California law, non-compete clauses are generally unenforceable: “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.” (Cal. Bus. & Prof. Code, § 16600(a).)
Choice of Law Provisions and Non-Compete Agreements
Generally, an employer cannot avoid the prohibition on non-compete provisions by including a clause designating another state’s law as governing an employment agreement with a California employee. (Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 902 [California courts are not bound to enforce a contractual conflict of law provisions which would thus be contrary to the state’s fundamental policy].) This means if you work in California, a non-compete provision in your employment agreement is likely unenforceable even if the employer has specified that the law of a state that allows non-compete clauses governs your agreement.
Statutory Exceptions and Ninth Circuit Rulings
However, the prohibition against non-compete provisions is subject to three statutory exceptions relating to (1) the sale of the goodwill of a business or all ownership interest in a business entity, (2) the dissolution or dissociation of a partnership, and (3) the dissolution or termination of a member’s interest in a limited liability company. (Cal. Bus & Prof. Code, §§ 16601 – 16602.5).
Moreover, until recently, the Ninth Circuit had created a narrow exception where the restrictions on competition are small or limited. (General Commercial Packaging v. TPS Package (9th Cir. 1997) 126 F.3d 1131 [finding that a contractual provision barring a subcontractor from working with specific named customers did not violate section 16600].). The California Supreme Court, however, has not embraced the Ninth Circuit’s narrow exception stating that “section 16600 is unambiguous” and that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” (Edwards v. Arthur Anderson LLP (2008) 44 Cal.4th 937, 949.)
Recent Legislation Codifies Edwards
In October 2023, Governor Newsom signed AB 1076, which codified the California Supreme Court’s decision in Edwards, voiding non-compete agreements “no matter how narrowly tailored” when they do not meet one of the statutory exceptions. (Cal. Bus. & Prof. Code, § 16600(b).) Furthermore, Governor Newsom recently signed SB 699, which went into effect on January 1, 2024, and prohibits employers from entering into a contract or attempting to enforce non-compete agreements. (Cal. Bus. & Prof. Code, § 16600.1.) The bill also allows an employee to bring a private right of action to enforce the laws and recover damages.
Conclusion
Thus, while a few Ninth Circuit decisions hold that a narrowly drafted non-compete provision is enforceable, newly enacted legislation clarifies that non-compete agreements are prohibited and void under California law, no matter how narrowly tailored, unless they meet one of the statutory exceptions.
Thank you for reading this post on non-compete clauses in California. For more information on recently passed legislation, please see my previous blog post, New Employment Laws 2023: Minimum Wage, Bereavement Leave, and More.