Non-Competition clauses in California Employment Agreements

by Michael Papuc
Attorney at Law
44 Montgomery Street, Suite 2405
San Francisco, California 94104
415-773-1755
Michael.Papuc@gmail.com

San Francisco Attorney Michael Papuc represents employees in California who have been penalized for leaving their job for a competitor of their former employer. Many of his clients are H-1B non-immigrant employees who have been penalized by former employers for moving to another job. The non-competition provisions are void and unenforceable, unless (1) necessary to protect trade secrets of the former employer, (2) part of an agreement for the sale of good will of a business, or (3) part of an agreement for dissolution of a partnership.

Business & Professions Code, sec. 16600, states:

"Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

In Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 242-243 (1965), the California Supreme Court held that non-compete clauses in employment contracts are void, unless they are necessary to protect an employer’s trade secrets. The Muggill Court said:

"With certain exceptions not relevant here, section 16600 of the Business & Professions Code . . . invalidates provisions in employment contracts prohibiting employees from working for a competitor after completion of his employment or imposing a penalty if he does so [citations], unless they are necessary to protect the employer’s trade secrets [citations]. . . . . [I]n this case, the provision forfeiting plaintiff’s pension rights if he works for a competitor restrains him from engaging in lawful business and is therefore void." (Id. at 242-243; emphasis added.)

The "certain exceptions" to Section 16600, are set forth in sections 16601 and 16602. There are no other exceptions to Section 16600. That was made clear in by the appellate court in Kolani v. Gulska (1998) 64 Cal.App.4th 402, 406, which stated:

"Business and Professions Code sections 16601 and 16602 permit broad covenants not to compete in two narrow situations: where a person sells the goodwill of a business, and where a partner agrees not to compete in anticipation of dissolution of a partnership. The latter sections reinforce the conclusion that covenants not to compete in contracts other than for sale of good will or dissolution of partnership are void." (Emphasis added.)
Thus, by statute, covenants not to compete are permissible when a person sells the goodwill of a business, and where a partner agrees not to compete in anticipation of dissolution of a partnership. By case law, covenants not to compete are permissible to protect trade secrets of an employer. There are no other exceptions.