Courts Rule Against Noncompetition Agreements

The California Supreme Court has repeatedly confirmed that noncompetition agreements are unenforceable in California. Agreements that restrict an employee’s ability to pursue similar employment after leaving a job are prohibited, even if they are narrowly written and leave a substantial portion of the available employment market open to the employee. Unless a noncompetition agreement clearly falls under one of the following exceptions, it will be unenforceable in California:

• Trade secrets protections, which can legally restrict an employee’s ability to use confidential information or company-defined trade secrets
• Sale of a business, which can legally restrict a seller’s ability to compete with the buyer in the geographic location where the seller had carried on their business
• Dissolution of a partnership, which can legally define a geographic area within which one of the partners cannot conduct a similar business

California courts consistently find that noncompetition agreements go against public policy because they restrict an individual’s ability to earn a living. Requiring a former employee to obtain a release of an invalid agreement constitutes unlawful interference with the employee’s rights. In addition, a waiver of “any and all” claims is not an illegal waiver of employee indemnification rights unless the waiver specifies that indemnification is being waived.3

In Dowell v. Biosense Webster, Inc., a California court held that the trade secret protection permitted under law does not automatically exist as an exception to noncompetition agreements.4

The Court of Appeals held that a broadly worded noncompetition and nonsolicitation agreement did not protect trade secrets. The court also expressed doubt as to the existence of a common-law trade secret exception to noncompetition agreements. Employers who want to protect trade secrets should consult with legal counsel for assistance in drafting agreements.

In addition, “no-rehire” clauses in separation agreements or settlements with an employee may constitute an unfair restraint on a person’s ability to earn a living.

In these agreements, companies often include language stating that the employee is not eligible for rehire with the company. These “no-rehire” clauses often prevent the employee from working at the specific job site where they worked before, and also at any other company location, subsidiary or affiliate.

In one case, the Ninth Circuit Court of Appeal called the legality of such no-rehire provisions into question, holding that Business and Professions Code section 16600 is not limited to just non-compete agreements and that it applies to every contract that restrains a person from engaging in their profession.5

The case involved a settlement agreement that prevented a doctor from working at any facilities that his former company managed or staffed. The court sent the case back to the lower court to determine if the no-rehire clause was a substantial restraint on the doctor’s medical practice.

Additionally, California law was recently amended to codify existing California case law holding noncompete agreements void absent an exception and makes it unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy specified exceptions.

The law also required employers to notify current and former employees who were employed after January 1, 2022, and whose contracts included a noncompete that doesn't fall into one of the exceptions, that the noncompete clause or agreement is void, as specified. Employers’ deadline for this notice was February 14, 2024.

California law also states that noncompete agreements are void regardless of where they are signed, i.e., regardless of whether the contract was signed, and employment was maintained outside of California.

1. Muggill v. Rueben H. Donnelly Corp., 62 Cal. 2d 239 (1965)