©2024 Seyfarth Shaw LLP www.seyfarth.com 2024 Cal-Peculiarities | 345 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 Effective January 1, 2024, the legislature amended section 16600, purportedly to reflect recent court decisions, declaring it “shall be read broadly . . . to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy an exception in this chapter.”2 The legislature also took the opportunity to require employers to notify all current and former employees (who were employed after January 1, 2022) who are bound by a noncompete clause that the noncompete clause is void (if it does not satisfy an exception). Failure to provide such notice violates unfair competition laws.3 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,4 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.5 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. The legislative updates to the law in 2024 were purportedly intended to codify the Edwards decision. 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.6 More recently, in late 2021, the Court of Appeal took the position that a company’s solicitation of certain executive employees subject to fixedterm employment agreements was a violation of Business and Professions Code sections 17200, et. seq. 7 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.” 8 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.9 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
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