346 | 2024 Cal-Peculiarities ©2024 Seyfarth Shaw LLP www.seyfarth.com 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.”10 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.”11 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.”12 Accordingly, California seems to make solicitation of customers by a former employee in California enjoinable only where the solicitation involves misappropriation of trade secrets. 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.13 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.14 So California became a favored forum for parties seeking judicial declarations that covenants not to compete are invalid.15 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.16 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.17 In 2013, the U.S. Supreme Court addressed the enforceability of forum-selection clauses.18 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.19 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. Effective January 1, 2024, the California Legislature further prohibited attempts by an employer to use the laws of another state by adding section 16600.5 to the Business and Professions Code. This new law provides that any non-compete clause is “unenforceable regardless of where and when the contract was signed” — even if the contract is valid under another state’s laws — no matter how narrowly tailored the provision is. Notably, this law does not require that the employee work or reside in California when the agreement was signed. If this law is upheld by courts, a noncompete provision that is otherwise enforceable under different state laws will become invalid when the employee moves into California. Prospective, current, or former employees may bring a private action to enforce their new right and may recover reasonable attorney fees and costs. Arguably, this legislative expansion levels the playing field and makes California employers more competitive by allowing them to hire employees who are bound by an out-of-state non-compete agreement.
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