Are noncompete or similar postemployment agreements enforceable in the state of California?

Examples of postemployment agreements include the following:

Noncompete agreements. A noncompete agreement typically restricts an employee from competing with the employer's business for a set time and/or in a specific geographic area. Noncompete agreements are unlawful in California outside of the exceptions listed below (see California Business and Professions Code Section 16600.1). Senate Bill 699 also prohibits noncompete agreements entered into out of state by employees now working in California and allows employees or prospective employees to sue for damages, injunctive relief, and attorneys’ fees against employers attempting to use unlawful noncompete agreements.

Nonsolicitation agreements. A nonsolicitation agreement restricts an employee from soliciting the business of specific customers of the employer, typically within a set time period. Nonsolicitation agreements are almost always void and unenforceable in California.

Nondisclosure agreements. A nondisclosure agreement prohibits an employee from using or disclosing confidential information that belongs to the employer, sometimes for a specified time period. Nondisclosure agreements are often enforceable in California if they do not define the protected information too broadly (i.e., the scope of the protected information does not significantly exceed protected trade secrets as defined by the Uniform Trade Secrets Act).

Antipiracy or antiraiding agreements. These agreements restrict one party from recruiting employees of the other party and are typically limited to a specific time period. Such agreements have been permitted in some circumstances by California courts. However, recent cases bring into question the viability of these agreements. As a result, employers should seek legal counsel.

Exceptions

California Business and Professions Code Sections 16601, 16602, and 16602.5 provide limited exceptions to the general rule against many postemployment agreements stated in Section 16600. In addition, some California cases have held postemployment restrictions enforceable to the extent necessary to protect an employer's trade secrets.

Sale of business goodwill exception. The seller of the goodwill of a business (the intangible portions of a business, such as its brand value and reputation that may have a value over and above that of its tangible assets) generally can agree not to compete with the business sold to a buyer within a specific area where the business has been carried on and for so long as the buyer continues to carry on like business in that area. Organizations should not assume that every sale of a business interest falls within this exception. There must be a clear indication that the parties considered goodwill as part of the sales price.

Dissolution of partnership exception. Partners generally can agree that a partner who departs the partnership (technically causing "dissolution" of it) will not engage in a competitive business, typically for a specific time and within a specific area. Organizations, however, should not assume that every noncompete agreement that is related to a partnership will automatically fall within this exception.

Dissolution of limited liability company exception. Shareholders in a limited liability company (LLC) generally can agree that an exiting shareholder will not compete with the LLC's business, typically for a specific time and within a specific area.

Common-law exception to protect trade secrets. Although not embodied in a statutory exception, numerous California cases have held postemployment restrictions enforceable to the extent necessary to protect an employer's trade secrets. A "trade secret" is a legal term described in the Uniform Trade Secrets Act. A postemployment restriction that might be invalid under Section 16600 might yet be held enforceable if necessary to protect trade secrets. California has not adopted a closely related theory known as the "inevitable disclosure doctrine," which has been adopted in a number of states. The inevitable disclosure doctrine suggests that an organization should be able to obtain a court order to prevent a former employee who had sufficient high-level access to certain kinds of trade secret information from accepting employment with a competitor because that employment, by its nature, would inevitably lead to the disclosure of the organization's trade secrets. Because California has not adopted the doctrine, it can be more difficult to prevent an employee from beginning the new job, but legal actions for money damages after the competing employment commences will generally remain available. Employers that hire an employee from a competitor can reduce legal risks by placing such employees in positions that do not involve the same kind of business as the former employer.

Although federal courts in the Ninth Circuit interpreted California law to also include an exception permitting "narrow restraints," the California Supreme Court rejected that view in the case Edwards v. Arthur Andersen LLP. As a result, the court held invalid a nonsolicitation agreement preventing an accountant for one year from soliciting his former employer's customers with whom he had worked during the employment, consistent with earlier cases from California courts. Assembly Bill 1076 codified the decision in 2023.

In Dowell v. Biosense Webster, 179 Cal.App.4th 564 (Cal.App.2d Dist. 2009), the California Court of Appeal held a noncompetition and nonsolicitation agreement void under the California Business and Professions Code and the Unfair Competition Law, affirming a judgment for two employees and their new employer. The court also cast doubt on whether any such restrictions can be upheld based on a common-law "trade secret" exception to the state's extreme disregard for such agreements.

Since the law under Section 16600 is frequently under development, employers should consult legal counsel and review agreements regularly for legal compliance.