©2023 Seyfarth Shaw LLP www.seyfarth.com 2023 Cal-Peculiarities | 339 12. Covenants Not to Compete 12.1 General Prohibition 12.1.1 The broad statutory language Most states enforce agreements by which employees agree not to compete with the employer for a reasonable period after employment, within a reasonable geographical area. In California it’s different. Section 16600 of its Business and Professions Code broadly declares that, with a few narrow exceptions, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”1 12.1.2 The literal judicial interpretation This broad statutory language notwithstanding, some courts once upheld contractual restrictions that did not totally restrain trade but rather simply limited how trade could be pursued. In 2008, however, the California Supreme Court, in Edwards v. Arthur Andersen,2 ruled that even narrowly drawn restraints are contractually invalid, unless they fall within a specific statutory exception, e.g., an agreement in connection with the sale or dissolution of a business organization.3 Edwards thus struck down a provision in an employment agreement restricting a departing employee from serving the employer’s customers. Edwards rejected the view that California law permits agreements that only “partially” or “narrowly” restrict an employee’s ability to practice a trade or profession. In 2020, the Supreme Court clarified that certain business-to-business non-competes are permissible to further legitimate business interests, such as licensing and joint collaboration agreements.4 More recently, in late 2021, the Court of Appeal took the position that a company’s solicitation of certain executive employees subject to fixed-term employment agreements was a violation of Business and Professions Code sections 17200, et. seq. 5 In upholding the lower court’s injunction, the Court of Appeal recognized the public policy underlying section 16600, but ultimately rejected the soliciting employer’s arguments in light of countervailing policies “favoring the stability and predictability of fixed-term employment relationships.” 6 12.1.3 Disregard for “blue penciling” and other approaches used in other states In some states, courts can “blue pencil” (redraw) an overly broad noncompete covenant to save the covenant’s lawful portions. California courts, however, refuse to enforce employment agreements with an anti-competitive effect even if the parties have agreed to “save” the clause to the extent possible.7 In a case where former employees challenged the enforceability of their agreement not to solicit the employer’s customers, the Court of Appeal declared the agreement invalid under California law, even though the agreement called for New Jersey law to apply. The Court of Appeal concluded that the agreement ran afoul of California law because the nonsolicitation provision was “not narrowly tailored to protect trade secrets and confidential information.”8 In another customer solicitation case, the Court of Appeal overturned a preliminary injunction against former employees soliciting customers, because California law “bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business.”9 At the same time, the Court of Appeal said that a trial court could enjoin “tortious conduct (as violating either the Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee[s] from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer.”10 Accordingly, California seems to make solicitation of customers by a former employee in California enjoinable only where the solicitation involves misappropriation of trade secrets.
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