Are Non-Compete Clauses Legal in California?

Non-compete clauses have been in the news at the federal level in recent months due to a Federal Trade Commission (FTC) proposed rule to ban them. This move comes on the heels of an executive order from the Biden administration asking for the FTC to do exactly that.

Federal officials claim these clauses are mostly used to suppress wages and result in limited competition and innovation. Businesses are pushing back, saying the use of non-compete clauses protects their trade secrets, intellectual property, and the integrity of their day-to-day operations.

This conversation is mostly moot in the state of California, however, because the laws in the state already bans the use of non-compete clauses in most circumstances.

California’s Ban on Non-Compete Clauses

California Business and Professions Code 16600 expressly prohibits the enforcement of non-compete clauses. The rule 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.”

This ban puts some businesses in a tough spot when managing trade secrets and intellectual property, but it also protects California’s status as an innovation capital of the United States and beyond.

Code 16600 is not just to be interpreted as a ban on non-competes but also non-solicitation clauses. Non-solicitation clauses are a type of restrictive covenant in contracts that prevent employees from leaving the company and soliciting the services of customers and employees of the former business. However, this does not mean you are able to take customer lists or other proprietary information with you whenever you leave a job in California. It’s important to tread carefully as an employee and employer when signing these contracts.

Exceptions to California’s Non-Compete Ban

The most notable exception to this rule comes in a merger or acquisition deal. If a business owner sells their business to another company, the sellers can be held to a non-compete clause. However, even then, the non-compete must be reasonable in time and geographic scope. For example, it cannot be in perpetuity and span the entire U.S. 

What If You Signed a Non-Compete Agreement?

Despite the ban, 45.1% of California businesses report including them in their employment contracts. How is this possible? Ultimately, the clauses are simply not enforceable. Businesses can include them in contracts all they want, but if the employee were to challenge the clause in court it would not hold up. Most employees don’t know this or are afraid to take action.

If you have your employees sign one, understand that these will not hold up in a court of law, and be prepared for the consequences of that.

Contracts with legally unenforceable terms are often at risk of being entirely thrown out by the court. That’s why it’s important to include a severability clause in your business contracts in the event of an employee, partner, or other party challenges the validity of a non-compete clause.At The Law Offices of Tyler Q. Dahl, we work with businesses to ensure their contracts will hold up to litigation. If you read this and were surprised to learn non-compete clauses are unenforceable in California, allow us to review your contract and assist your business in finding alternatives to protecting your trade secrets and intellectual property.

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Dahl Law Group

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