Why are Non-Competition Agreements illegal in California?


Non-competition clauses in contracts intrude on an employee’s fundamental right to survive and make a living, either in subsequent employment or self-employment. They are an affront to human dignity and should be vigorously resisted. We will be glad to represent any employee who wants to challenge a Non-Competition Agreement.

“Freedom of contract” is a myth. Just because you sign a contract, it is not automatically enforceable in Court. Despite the nineteenth century idea that contracts carry a moral obligation, in the eyes of the law, contracts are not holy writ. Courts can and do declare contracts illegal and refuse to enforce them. This is particularly true when a contract is contrary to public policy, that is, the contract is one, which the legislature has declared unlawful because it doesn’t fit the views of our elected representatives. Contrast this with the more traditional view that the parties to a contract know what’s good or bad for their individual situation. The problem as applied to employment law, however, one of bargaining power. Typically, employees live paycheck-to-paycheck while employers have more resources and can use economic leverage to dictate the terms of a contract. Hence, any notion that any employment contract is “voluntarily” signed, is fiction.

While many states enforce reasonable non-competition covenants, California takes a very different approach. In California, agreements not to compete after the employment term has ended are generally invalid, except in connection with the sale of a business. Business & Professions Code §16600 is clear: “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business is to that extent void.” California law thus voids any provision, contract term or purported "agreement" that prevents a California employee from working where he or she wants. Simply put: restrictions on an employee's right to work where and for whom he or she wants, are illegal and cannot be enforced.

In Court, however, matters are not "cut and dried" or simple. Why? Over the years the California legislature has left it up to the courts to interpret and apply Section 16600 to fact-specific disputes. This means that some disputes go to trial and then work their way through the appeal courts.

Noncompete agreements are sometimes "hidden" or "buried" in documents titled: employment; nondisclosure; confidentiality; or nonsolicitation agreements. Despite proper sounding labels, such agreements may constitute unlawful restrictions to a California citizen's right to work.

Even though a noncompete clause or agreement may be unlawful and unenforceable in California, many employers still include them in agreements knowing: 1) most employees will not have the money to seek an attorney's opinion on the validity of the provision; 2) most employees will simply assume the restrictions are valid; and/or 3) for these reasons or others, employees will not challenge the provision or employer.

Typically, the employer seeks to enforce noncompete agreements so to prevent ex-employees from going to work for a competitor, unfairly taking the employer's clients, customers or employees, or to stop the former employee from establishing or operating a business in direct or indirect competition against the former employer. More often than not, the employer has the means to hire lawyers, file a lawsuit and expend significant sums of money to attempt enforcement of its noncompete agreements.

The California Court of Appeal recently concluded, in D'Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (2000) that it is a violation of public policy for an employer to terminate an employee who refuses to sign an unlawful covenant not to compete. In D'Sa, the employer hired Mr. D'Sa and then later asked him to sign a confidentiality agreement. In part, the confidentiality agreement provided, "Employee will not render services, directly or indirectly, for a period of one year after separation of employment with Playhut, Inc. to any person or entity in connection with any Competing Products."

Mr. D'Sa refused to sign the confidentiality agreement because he felt the quoted provision constituted an improper covenant not to compete. The employer then fired Mr. D'Sa based on his refusal to sign the confidentiality agreement. Mr. D'Sa sued the employer, claiming that the employer violated public policy when it terminated his employment for refusing to sign an unlawful covenant not to compete. The D'Sa court agreed stating, "California law would protect if defendants sought to overreach by trying to enforce the covenant not to compete, and California law will also protect him from a termination of his employment brought on by his refusal to sign an agreement containing the illegal covenant." In its defense, the employer noted that the confidentiality agreement contained a "severability" clause, which stated that if any provision of the agreement was illegal, the illegal provision would be void, but the rest of the contract would remain enforceable. Based on the severability clause, the employer argued that the illegal covenant not to compete could never be enforced. Therefore, the employer had not violated public policy when it fired an employee who refused to sign a confidentiality agreement that merely contained an unenforceable covenant not to compete. The D'Sa court rejected this argument because it felt the mere existence of the illegal covenant not to compete could undermine employee rights. The court noted that most employees probably would not know that the covenant not to compete was illegal. Consequently, the court speculated, employees might in fact refrain from competing even though they had no obligation to do so.

The D'Sa decision establishes that employers may not fire employees who refuse to sign unenforceable covenants not to compete. More likely than not, California courts will further conclude that the mere inclusion of an unenforceable covenant not to compete in an employment contract is actionable as an unfair business practice because of the potential deterrent effect the covenant could have on lawful competition.

On April 12, 2000, the California Supreme Court depublished an appellate court decision that had adopted the "inevitable disclosure" doctrine. This doctrine provides that employees who are given access to trade secrets may be prevented from working for competitors if the new job would "inevitably" require the employees to use or disclose their former employer’s trade secrets. The adoption of the inevitable disclosure doctrine in California late last year was seen as a valuable new tool for employers who needed to protect their confidential information and trade secrets. By depublishing the appellate court decision, the Supreme Court has tacitly rejected the doctrine and limited the employers’ ability to prohibit key employees from competing.

In October, 2002, California’s Fourth District Court of Appeal rejected the inevitable disclosure doctrine, finding that it was “contrary to California law and policy.” Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443 (Sept. 12, 2002). The employee in that case had signed a confidentiality agreement, but had not signed a covenant not to compete. The court held that allowing an injunction in these circumstances would turn the confidentiality agreement into an after-the-fact covenant not to compete and would hinder employee mobility. Previously, no published California state court decision existed either accepting or rejecting the “inevitable disclosure doctrine

California courts have been clear that non-compete agreements are not enforceable in California. However, California law does prohibit the use, theft or conversion of trade secrets. The difficulty for employers is protecting their trade secrets before they are used or disclosed or, in the worst case, proving that trade secrets were actually used or stolen. This is why the inevitable disclosure doctrine was so important; even without a non-compete agreement, it allows employers to prevent the misappropriation of trade secrets before such mischief can occur.

If a company’s employee leaves for a new job with a competitor and it is then believed that the employee will “inevitably disclose” trade secrets, can the company prevent him from working there? The rule in California: not unless the employee has previously agreed to that in an enforceable non-compete agreement. Such agreements are very difficult, if not impossible, to enforce in California, even if made out of state.

The California Court of Appeals for the First Appellate District, ruling in a case out of the Superior Court for the City and County of San Francisco, issued a decision in a case entitled The Application Group, Inc. v. The Hunter Group, Inc., 61 Cal.App.4th 881, In essence, The Application Group opinion held that the enforceability of a covenant not to compete in an employment contract is governed by California law prohibiting such covenants where any California employer recruits a non-California employee for employment, at least in part, in California. Standing alone, such a rule is not particularly extraordinary. However, the underlying case here involved an employment contract between a Maryland corporation and its employee, also a Maryland resident. The contract contained a covenant not to compete that was upheld by a Maryland court, as well as a choice of law provision designating Maryland law as the law to be applied to disputes arising under the contract. In the face of this, the California Court of Appeals nonetheless held that the non-compete provision would not be enforced by a California court to prevent a California employer from hiring the employee of the Maryland corporation prior to the expiration of the non-compete period.