California Non-Compete Laws

AdobeStock_523210302-300x200One tool that employers have traditionally used to protect their business interests is to have key employees sign non-compete agreements. Such contracts are controversial and recently, the U.S. Federal Trade Commission proposed a new rule that would ban non-compete agreements nationwide.

Here in Los Angeles, California state law already heavily restricts the use of non-compete agreements. So if your business has questions or concerns about whether it can effectively use a non-compete, it is best to contact the Los Angeles employment attorneys at SLG to learn more about this area of law as well as other strategies used to protect a company’s interests.

In Los Angeles Most Non-Competes Are Illegal

A non-compete agreement is a contract between an employer and employee in which an employee agrees they will not compete against the employer, directly or indirectly, for a specified term after the employment relationship has ended. This can mean the employee cannot work for a direct competitor, start a company that provides similar goods or services, or even influence other employees to join the employee in a competing business.

According to the FTC’s proposed rulemaking notice about 30 million people–roughly 1 out of every 5 workers in the United States–is subject to some type of non-compete agreement. The Commission estimates that a nationwide ban on non-competes could increase worker earnings by as much as $300 billion a year.

But what about the current state of the law in California? Well, the general rule in the Golden State is that non-competes are unenforceable. Section 16600 of the California Business and Professions Code states, “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.”

In short, California courts will not enforce any non-compete agreement unless a specific exception applies. And an employer cannot circumvent this by having a California worker sign an agreement that applies the law of a different state. Such “choice of law” provisions have also been deemed unenforceable by California courts as a violation of the state’s public policy disfavoring non-compete agreements.

The Exceptions to the Rule

Section 16600 does reference exceptions to the general ban on non-competes in California. So what are those exceptions? Here is a brief rundown:

  • If an owner sells their business, the seller and buyer may agree that the seller will not start a new, competing business in the same geographic area.
  • If a partner leaves a partnership, both sides can agree that the former partner will not engage in a similar business in the same geographic area.
  • Similarly, if a member leaves a limited liability company (LLC), both sides can agree that the former member will not engage in a similar business in the same geographic area.

Always Check with a Los Angeles Employment Attorney First

Even where employers cannot use non-compete agreements to prevent employees from starting or working for a competitor, there are other legal means to protect key business assets such as trade secrets and intellectual property. Such non-disclosure agreements are valid if carefully drafted to comply with California law. If you need further legal guidance, contact the Los Angeles employment attorneys at SLG today at (310) 818-7500 or contact us online to schedule a consultation.