Many business owners wish to include non-compete and non-solicitation clauses in contracts. A non-compete clause (or separate non-compete agreement) typically prohibits one party from competing against the other party for a specific duration after the contract ends. California courts frown upon non-compete clauses, and there are pitfalls when including these clauses in contracts.
Section 16600 of the California Business & Professions Code makes unlawful all contracts that restrain someone “from engaging in a lawful profession, trade or business of any kind.” However, a non-compete clause may be enforceable against the seller of a business, a former business partner, or a former member of a LLC (Cal. Bus. & Profs. Code §§ 16601-16602.5). A non-compete clause may also be enforceable if necessary to protect the former employer’s trade secrets (California courts have not yet invalidated such clauses). For example, employers cannot prohibit former employees from competing against them, but they may prohibit the employees’ use of the company’s trade secrets (i.e. software code) when working for a subsequent employer.
A non-solicitation clause typically prohibits one party from soliciting the business of another party for a specific duration after the contract ends. Similarly, an employer may wish to use a non-solicitation clause to prevent its own employees from leaving the company and soliciting other valuable employees to leave and join a new company. Non-solicitation clauses are also invalid in California if unnecessary to protect trade secrets. For example, a non-solicitation clause may be valid if it prohibits an employee from using a former employer’s customer list to solicit business if the customer list was a trade secret. However, an employee may solicit other valuable employees to leave the company and join a new company. In this case, the same non-compete principles mentioned above would apply to the former employees.
Some have creatively drafted contracts requiring the laws of a different state that is more favorable to non-compete clauses to apply. California courts will enforce a contract provision such as this if the chosen state has a substantial relationship to the parties or the transaction. The courts may also enforce such a provision if there is any other reasonable basis. Absent these justifications, California courts will generally invalidate any contract provision that is contrary to the fundamental public policy of California (such as non-compete and non-solicitation clauses).
Business owners should structure non-compete and non-solicitation clauses so they are limited in duration, and limited to localities where the business is conducted (or is reasonably intended to be conducted). Failure to incorporate these locality and duration restrictions may result in the narrowing or invalidation of a non-compete or non-solicitation clause.
If you have any questions or concerns regarding these matters, please do not hesitate to contact the Law Offices of Tyler Q. Dahl.
Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.