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What Is The Law On California Restrictive Covenants In Employment?

california-restrictive-covenants-laws-what-are-they-1.pngThe answer to this question is actually fairly straightforward: Restrictive covenants have been illegal in the Golden State for nearly a century and a half, and they will probably remain illegal for at least the next century and a half.

It all goes back to Section 16600 of the Business and Professions Code, which states 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." With words like every and anyone, the measure is extremely broad and may even swallow up some well-settled common law exceptions that are more fully discussed below.

To justify this blanket ban, the statement of purpose section states that "The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of employers." In short, California did not get its reputation as one of the most employee-friendly at-will employment states in the country through smoke and mirrors; instead, that label is based on laws like Section 16600.

California Restrictive Covenants Laws in Employment

Restrictive covenants laws are aggressively enforced and broadly interpreted. If any language in the employment contract, severance agreement, or other document violates Section 16600, it probably also runs afoul of Business and Professions Code Section 17200, otherwise known as the California Unfair Practices Act. Courts have consistently held that these laws apply to:

  • Workers who live in California,
  • Out-of-state workers who were employed by a California company, and
  • Out-of-state workers who work for out-of-state employers, but perform services in California.

Section 16600 also gives employees the right to sue in almost any situation rationally related to a noncompetition agreement.

California Restrictive Covenants Laws Examples & Recent Developments

In 2008, the Supreme Court of California decided Edwards v. Arthur Andersen. Company workers had to agree that, once they left, they would not "perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation," unless they went to work for the client. Arthur Andersen essentially tried to leverage an argument that had gained traction in a federal appeals court, i.e., the restrictive covenant was narrow enough to pass muster under the law.

But the Supreme Court would have none of it, as the justices declared that Section 16600 "unambiguously" applies to any restraint. The justices even went a step further, and held that non-solicitation provisions that prohibit departing workers from taking existing clients with them are also illegal restraints. In the years since Edwards, California courts at all levels have not hesitated to draw bright lines and excise any provisions in any employment-related agreement that could arguably limit the workers' right to practice their chosen professions.

Is There Anything Left?

The Edwards court did not address the common law "trade secrets" exception, which prohibits departing employees from taking confidential information with them and using it for business purposes. A few courts had acknowledged the exception but did not define it.

Then came The Retirement Group v. Galante (2009). The trial court had granted an injunction in favor of TRG that prohibited former employees from "directly or indirectly soliciting any current TRG [customers]." But, the Fourth District Court of Appeals ruled that a judge could not enter an injunction that ran afoul of Section 16600. In other words, although the court did not strike down the trade secrets exception, it removed any ability that courts had to enforce it.

California Law on Restrictive Covenants in Employment: For Further Reading

  • Restrictive Covenants in California via The California Department of Fair Employment and Housing
  • Business and Professions Code Section 17200: California Unfair Practices Act
  • Business and Professions Code Section 16600
  • Legal Definition of Restrictive Covenants via The Free Dictionary: Legal Dictionary

If you feel that your employer is violating California restrictive covenants laws, our expert employment attorneys at Hennig Ruiz can help. Contact us for your free consultation today.

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