California’s Legal Landscape: The Truth About Non-Compete Agreements

The state of California has a common law principle that voids non-compete contracts. This blog post from 4cats2 notes that the result is that in California, “courts will enforce confidentiality agreements [but] non-compete agreements are illegal.” New employers are continually shocked when learning this fact. I see surprised looks on their faces all the time as Section 16600 of the California Business and Professions Code is explained to them. Yet the public policy reasons for this law are clear: it fosters economic growth. The article points out that the last twenty years has seen California become a center of innovation, partially due to the protection of its non-compete laws. It provides that: [T]he lessened possibility of going into a non-compete agreement means California businesses experience more competition from entering companies. That means it’s easier for employees to switch jobs and retain a competitive skill set without the fear of a non-compete agreement. These protections have strengthened California’s economy and attracted well-educated talent from abroad.

4cats2 concludes by reviewing a recent decision which narrowed the application of the rule, establishing that California employers (and those of us litigating such matters) should take heart that total elimination of non-competition agreements is not the only way to safeguard the California economy. The court’s decision is reviewed here. More broadly, the California approach to non-compete laws has had a substantial effect on other states attempting to establish themselves as a “tech hub” to compete with Silicon Valley, and many of the same chambers of commerce on behalf of large companies that can be found in other states lobbying against a non-compete ban of any type are all in favor of California’s business-friendly law in court cases. Companies attempting to operate involved with California-based subsidiaries or companies are well advised to take heed of these rules. As affirmed by the Ninth Circuit, California’s law applies equally in these instances. See, e.g., Montalvo v. Spirit Airlines, case no. 17-55616 (9th Cir. Apr. 12, 2018) (noting that the choice of law provision in a non-compete agreement was unenforceable because California had a materially greater interest in resolving the dispute, because the employer was a California company).

Given the fact that the 9th Circuit includes almost all of west coast, and southern border states of Texas and Arizona, this precedent makes California’s prohibitive approach a global business issue, not just a local employment law issue. For more information on non-compete agreements, you can visit Wikipedia.