California is notoriously hostile to covenants not to compete and covenants not to solicit customers that seek to prevent an employee from engaging in a lawful profession, trade, or business. These are known as “restrictive covenants,” and California Business & Professions Code §16600 generally voids any restrictive covenant in any contract in California, except in connection with the the sale of a business, or the dissolution of a partnership or LLC.
Employee Mobility/Restrictive Covenants
For decades, California employers have looked for ways around California’s prohibition on the use of non-competes. Some employers ignored the law and continued including illegal non-competes in their employment agreements in the hopes that the language – even if legally unenforceable – would have a deterrent effect. Other employers took a different approach, adding language to their contracts purporting to make them governed by the law of some other state (like New York) that was more tolerant of restrictive covenants. To this day, many employers continue to insert non-solicitation clauses in their employment agreements. These employers defend that practice by arguing that their customers’ identities and contact information are protected “trade secrets.”
California cracked down on these practices by passing two new state laws that took effect on January 1, 2024. Today, most covenants not to compete and not to solicit customers are illegal in California regardless of where and when the underlying employment contract was signed, even if the employment was maintained outside California. Any employer in California who attempts to enforce an illegal restrictive covenant against an employee can be sued by that employee for “unfair competition” and made to pay damages, attorneys’ fees, and a $2,500 civil penalty.
There are arguments to be made that, by purporting to ban restrictive covenants in California even for employees who work in other states or who sign contracts in other states, California’s new laws are unconstitutional. These arguments are being made right now in courts across California. Even if these new laws are eventually upheld, covenants not to solicit and covenants not to compete can still sometimes be used in California provided that a legal exception applies to allow them in a particular situation, and the contract containing them was expertly drafted to mirror that legal exception.
How Workplace Legal Can Help
Workplace Legal attorneys understand California’s complex and ever-developing laws on covenants not to compete, covenants not to solicit, and other restrictive covenants. We constantly monitor new legislative developments, new administrative regulations, and new court decisions. This allows attorneys in our Counseling & Preventive Advice practice, for example, to give expert advice to an executive who previously signed a restrictive covenant but who is now looking to join a competitor and take customers or other employees with them. We also advise employers on other ways to protect their competitive advantage when restrictive covenants are likely to be challenged.
Our attorneys also know how to draft a restrictive covenant when the client’s particular situation might allow for it. We know the precise language to use in the contract – and, equally importantly, the precise language to avoid – in order to give the client the best chance at having the restrictive covenant upheld and enforced by a court. When a restrictive covenant simply cannot be used, we know how to draft other agreements that will protect our client’s interests.
Attorneys in our Employment Litigation & Trials practice have litigated cases in both state and federal court involving covenants not to compete, covenants not to solicit, and other restrictive covenants. We have represented executives who are challenging a previously signed restrictive covenant, and we have represented companies seeking to enforce contracts containing restrictive covenants. We’ve also resolved disputes about restrictive covenants through intensive pre-litigation negotiations, sparring our client from the cost and expense of protracted, public litigation.
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