340 | 2023 Cal-Peculiarities ©2023 Seyfarth Shaw LLP www.seyfarth.com California’s broad ban on covenants restraining trade can apply even if the parties entered into the covenant in a state where such covenants are lawful.11 This peculiar hostility to noncompete covenants has encouraged a “race to the courthouse” to get a dispute heard in the state most congenial to a party’s litigation interest.12 So California became a favored forum for parties seeking judicial declarations that covenants not to compete are invalid.13 12.1.4 The limited effectiveness of forum-selection provisions Some employers have sought to avoid California determinations of their employment agreements by convincing federal courts to enforce forum-selection clauses that call for litigation to occur exclusively in some other designated state.14 But a forum-selection clause addresses only the site of the adjudication, not the choice of which state’s law to apply, so an out-of-state court could still apply California law.15 In 2013, the U.S. Supreme Court addressed the enforceability of forum-selection clauses.16 This decision, although not involving an employment dispute, suggested that (1) forum-selection clauses calling for litigation to occur exclusively in a state other than California are valid, and (2) such clauses can require that, upon transfer of a California-based action to a non-California jurisdiction, the law of that jurisdiction should apply.17 In 2016, however, the California Legislature further hindered an employer’s ability to leverage forum-selection clauses. Labor Code section 925 dramatically reduces the reach of forum-selection clauses. The law forbids employers to require an employee “who primarily resides and works in California” to agree to a contractual provision that would either “[r]equire the employee to adjudicate outside of California a claim arising in California,” or “[d]eprive the employee of the substantive protection of California law with respect to a controversy arising in California.” (See § 5.3.) The principal loophole is for contracts where the employee is represented by legal counsel in negotiating the contract. Section 925, obviously, greatly curtails an employer’s ability to use nonCalifornia courts to enforce noncompete covenants. 12.1.5 The ban on noncompete covenants as applied to buy-sell contracts Section 16600’s ban on noncompete covenants is subject to a statutory exception applying upon the sale of all or substantially all of a business, including its goodwill.18 But the Court of Appeal has held that when the sale involves two separate agreements—a stock purchase agreement and an employment agreement—the agreements must be read together. The Court of Appeal concluded that the employment agreement’s covenant not to compete or solicit, which was not designed to protect the acquired company’s goodwill, failed to qualify under the “sale of business” exception.19 In 2022, the California Court of Appeal enforced a non-solicitation-of-customers provision.20 The defendant had founded several real estate development firms. In a complex series of transactions, he consolidated these firms into a new entity—that he owned—sold fifty percent of his ownership interest to a third party, and was hired as the CEO. Four years later, he was terminated for cause. He formed a new company and solicited his “past and potential future customers.”21 The Court of Appeal focused on the consolidation phase of the transaction to find that the defendant had transferred all or substantially all of his businesses. Further, the defendant owned the new entity when he consolidated his businesses, but the Court of Appeal held that this was immaterial. The court focused on whether he sold or otherwise disposed of all of his business interests when he conveyed his entire ownership stake in his various companies.22 Because he did, the sale of business exception applied and the non-solicitation provision was properly enforced.
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