Generally, California courts will not enforce non-competition agreements that prohibit former employees from competing with their former employer unless the employee was also an owner of the business or upon transfer of an ownership interest in a business. Even if this threshold for enforcement is met, California courts have not, in the past, enforced non-competition agreements that are not narrowly tailored in an objectively reasonable manner as to time, place and subject matter. Recent cases indicate that California courts may be moving toward finding all non-competition agreements unenforceable as “restraints on trade” and as limits on California’s public policy of freedom of employment.
A narrow exception to California’s refusal to enforce non-competitions may have been crafted by a Delaware Court for those Delaware companies with California employees who affirmatively choose application of Delaware law in their employment agreements.
In NuVasiv, Inc. v. Miles, Miles, a director, officer and California employee of NuVasiv, terminated his employment immediately and went to work for a competitor. Miles’ employment agreement contained a non-competition clause and a Delaware choice of law provision. In entering into the employment agreement, the Court assumed Miles had been represented by legal counsel.
After Miles signed the agreement, but before he terminated his employment, California enacted Labor Code section 925 that, for the first time, created an exception to California’s requirement that employment matters with California employees be adjudicated in California pursuant to California law as a matter of public policy. Under Section 925(e), California employees, who are represented by legal counsel in the negotiation of their employment contracts, may contract to adjudicate in a different forum and therefore, choose the law that will apply to their employment agreement.
NuVasiv sued Miles to enforce the non-competition agreement in Delaware. Miles claimed the non-competition agreement was not enforceable since he was a California employee and California law, at the time he contracted, made the non-competition provision and choice of law provision unenforceable as a matter of public policy. The Delaware Court disagreed and decided the California Labor Code section 925(e) exception reflected that California’s public interest in prohibiting covenants not to compete where the employee is represented by counsel as being weak, in contrast with Delaware’s policy in favor of freedom of contract as being strong. The court then concluded that it would apply Delaware law in ruling on the covenant not to compete.
The result is highly questionable. It is not certain that the Delaware court made a correct assumption about California law. The invalidity in California of covenants not to compete is intended to protect the public as a whole, not just employees per se. It provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Nothing in Business & Professions Code section 16600 (or in the statutory exceptions at section 16601 et seq.) refers to employees or employers as such or depends on an employment relationship; it applies regardless of the nature of the parties.
Section 16600 prohibits all agreements in restraint of trade (except as statutorily permitted), not simply employee non-competition agreements. Statutes prohibiting restraints of trade are not intended to protect the parties to anti-competitive agreements; they are intended to protect the public by prohibiting such agreements. Nothing in Labor Code section 925 states that agreements specifically covered by it can override statutes such as Business & Professions Code section 16600 designed to protect the public.
It is unclear whether the Delaware court took Business & Professions Code section 16600 into consideration in reaching its decision.
While, for now, California employees who are represented by legal counsel in the negotiation of their employment agreement may choose applicable law and adjudicatory forums other than California. Foreign businesses with California employees who were represented by legal counsel when they negotiated their employment agreements prior to enactment of Labor Code section 925 may have a way to enforce their non-competition agreements, at least if the foreign business is domiciled in Delaware. Employers and employees may have to await further judicial developments to advise whether the NuVasive case would have had a different result had the Delaware court considered Business & Professions Code § 16600.
The law surrounding Non-competition agreements in California is intricate. Employers should consult their legal counsel before they include non-competitive covenants in their employment agreements with their California employees.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
