| Non-Compete Court Rulings | ||
Summary In general Non-compete agreements are illegal in California. However, there are two exceptions in California. Non-compete agreements are enforceable for partnerships and when someone is selling their ownership interest in a company. Section 16600 invalidates agreements to preclude employment in a certain line of work. The section has also been construed by California courts as invalidating agreements that seek to prevent former employees from accepting work from any of the former employer's clients. (Morris v. Harris (1954) 127 Cal.App.2d 476.) A former employee may also solicit employees from his or her former employer if unlawful means or acts of unfair competition are not used. (Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244.) Business Owner Exception Business & Professions Code § 16601 creates an exception permitting lawful non-compete agreements for company owners. A new section 16602.5 also applies to members of limited liability companies. It applies when a shareholder "sells" their stock to another for valuable consideration. (Hilb, Royal & Hamilton Ins. Services v. Robb (1995) 33 Cal.App.4th 1812, 1824-1825.) Partnership Exception (Howard v. Babcock (1993) 6 Cal.4th 409.) For example, a partnership agreement may validly restrict competition by precluding withdrawing partners from practicing in a limited geographic area. (Id.) Unlike business sales and section 16601, there is no requirement pursuant to section 16602 that compensation for goodwill in the partnership be transferred. South Bay Radiology Medical Associates v. Asher (1990) 220 Cal.App.3d1074, 1083.) Section 16602 has been held applicable to partnerships involving accountants (Swenson v. File (1970) 3 Cal.3d 389), attorneys (Howard v. Babcock (1993) 6 Cal.4th 409), and physicians (South Bay Radiology Medical Associates v. W.M. Asher, M.D., Inc. (1990) 220 Cal.App.3d 1073, Farthing v. San Mateo Clinic (1956) 143 Cal.App.2d 385). Can I be Terminated or Not Hired if I do Not Sign a Non-Compete?An employee or prospective employee cannot legally be terminated or not hired if they refuse to sign a non-compete agreement. As explained in D'Sa v. Playhut, Inc. (2000) -- Cal.App.4th -- , an employee can sue for wrongful termination if they are fired because they refuse to sign an illegal non-compete agreement. Usually, though, the employee would prefer to be employed rather than be unemployed and embroiled in litigation that could take a long time to resolve. Since non-compete agreements are not valid, one strategy for the employee is to sign the agreement knowing that the paper is worthless and thereby be employed. |