California Restrictions on Non-Compete and Non-Solicitation Agreements
A common practice of many business owners is to have any new contractor or employee sign a standard non-compete and non-solicitation agreement on signup. Naturally, a business has a vested interest in keeping employees from being raided by competitors, and to protect sensitive information such as customer lists and other trade secrets from falling into the wrong hands.
However, unbeknownst to many small business owners, California has some of the most restrictive laws in the country relating to restraints on trade. California Business and Professions Code Section 16600 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.” This provision has been interpreted to mean that any contract having an anti-competitive effect or otherwise restrain anyone’s ability to engage in their profession is illegal. In other words, that standard non-compete and non-solicitation agreement may come back to haunt you if it is not drafted properly!
California courts have addressed non-compete and non-solicitation agreements in the following contexts: (1) non-competition provisions where an employee is is prohibited from working for competitors of the employer for a certain period of time after termination of his employment; (2) customer nonsolicitation covenants, in which the employee is prohibited from soliciting the former employer’s customers; (3) third party “no-hire” covenants, in which a customer of the employer or competitor of the employer agrees not to hire the employees of the employer; (4) employee “no-hire” covenants, in which an employee is prohibited from hiring former coworkers after termination of his or her employment; and (5) employee nonsolicitation covenants, in which the employee is prohibited from soliciting former coworkers after termination of his or her employment.
In addition to a long line of California jurisprudence disapproving non-competition restrictions after an employee’s termination, recent case law suggests that non-solicitation provisions are headed in the same direction.
California courts have taken the approach that that a customer nonsolicitation covenant may be upheld if it is narrowly tailored to only prohibit the active solicitation of customers, as opposed to more passive conduct that does not amount to solicitation. Subsequent court rulings narrowed the application of this rule to only the hiring of employees, and not in the context of third party no-hire covenants.
Therefore, generally speaking any non-solicitation provision that restrains an employee’s ability to engage in their professions runs the risk of being held unenforceable, and recent cases have extended this reasoning to customer non-solicitation agreements and employee non-solicitation agreements. To make matters worse, California courts have also held that: (1) a company’s use of such unenforceable agreements can violate California Business and Professions Code Section 17200, also known as the Unfair Competition Law; and (2) courts will not “blue pencil” such invalid agreements to make them enforceable.
The takeaway from these cases is that any California business owner should take great care using non-compete and non-solicitation agreements, and a qualified California attorney can assist in crafting an agreement that does not run afoul of California strict non-compete and non-solicitation laws.