Covenants Not to Compete and Non-Solicitation Provisions
For more information on covenants not to compete, please see the previous issue of this newsletter.
The world of covenants not to compete is ever-evolving. As for legal developments, perhaps California is far more complex and nuanced in this field than most jurisdictions. This brief analysis addresses the basic parameters of the law surrounding a covenant not to compete and non-solicitation provisions in California. It also reviews two court decisions as real-world exemplars of how California courts apply this law.
California Law for Covenants Not To Compete
California forbids the use of covenants not to compete by statute. See Cal. Bus. & Prof. Code § 16600. But—like so many laws—there are exceptions. By statute, there are three instances in which a covenant not to compete is enforceable:
(1) One who sells all of one’s ownership interest in a business entity to a buyer who will carry on the business may agree with the buyer not to carry on a similar business within a specified geographic area;
(2) Upon dissolution of a partnership or dissociation of a partner, such partner may agree not to carry on a similar business within a specified geographic area; and
(3) A member of a limited liability company may agree not to carry on a similar business within a specified geographic area, so long as other members to the business carry on a like business.
In these three specific instances, California courts have held that a covenant not to compete is enforceable.
Further, courts will occasionally permit non-solicitation or a non-interference agreement that limits some aspect of employment but does not entirely prevent an employee from working in their chosen profession. For example, in Twentieth Century Fox Film Corp. v. Netflix, Inc., No. SC126423, 2019 WL 8013589, at *27 (Cal.Super. Dec. 10, 2019), the Superior Court enforced a non-solicitation clause that prevented an employee from soliciting the company’s employees after he or she left.
In brief, California generally holds covenants not to compete are unenforceable, but non-solicitation provisions may be enforced.
Blaisdell v. Evo Exhibits, LLC
Blaisdell v. Evo Exhibits, LLC, No. 18CV330111, 2019 WL 10981955, at *1 (Cal.Super. June 12, 2019), provides another example of the California approach. There, a former employee sued his old company, seeking a declaratory judgment that his covenant not to compete was void and unenforceable. The employee was a former sales representative—a common position for covenants not to compete—and he worked out of a home office in California. As is typical in non-compete scenarios, the employee signed the agreement as part of an “Employment at Will Agreement.” The agreement contained a governing law and choice of forum provision providing for the application of Illinois law to be litigated in courts in Cook County, Illinois. When the employer terminated the employment relationship of the employee and sought to enforce the agreement, the employee sued.
The California Superior Court held the covenant not to compete was void in its entirety and unenforceable under Cal. Bus. & Prof. Code § 16600. The court noted that California had prohibited covenants not to compete precisely like the one in controversy for years.
Conclusion
The area of covenants not to compete is complex and frequently localized. When addressing these situations in California, be sure to review the relevant statutes and their exceptions. As a generalization, California courts typically find covenants not to compete to be unenforceable. In contrast, non-solicitation provisions may be enforceable in California.
