California Non-Compete Agreements and the Law

Non-compete agreements for employees are sharply restricted in certain jurisdictions.  For example, in California, such agreements are generally illegal and unenforceable (even when the parties attempt to specify the law of another state that is more amenable to non-competes will apply), the major exception being when such an agreement is entered into by the parties as part of the sale of a business from one party to another.

For California business owners, a non-solicitation and confidentiality agreement are good alternatives to a California non-compete agreement.

In Alabama, non-competes are unenforceable against professionals such as accountants, doctors, and lawyers.  In Georgia, if any aspect of a non-compete agreement is determined to be invalid, the entire agreement will usually be deemed null and void.

Courts in most states look with disfavor on non-compete agreements and may choose to enforce them only when there is evidence the provisions of the agreement are fair and reasonable under the circumstances.

Although the precise outlines of what is considered fair and reasonable vary from state to state, in general, evidence the agreement is fair and reasonable typically includes such things as the equality of the bargaining power of the parties; whether the agreement is reasonably necessary to protect the employers’ legitimate business interests; whether the agreement prevents the party signing it from making a living in his or her chosen occupation (that is, what activities are allowed after signing the non-compete?); whether the party who is restricted has been adequately compensated for signing the agreement (or, in legal terms, whether the consideration for the contract is sufficient); and the scope of the time and place limitations.

With regard to these last two factors, time and place; it may seem tempting to fill out the form with the most expansive time and geographic limits.  Doing so, however, will make the agreement more likely to be struck down by a court as overbroad and therefore unreasonable and unenforceable.

Is it therefore often the better policy to limit competition only so far in time and place as is necessary to protect the reasonably foreseeable business interests of the employer.  As a general rule, anything over two years is likely to face an uphill battle in being enforced, which is not to say that restrictions of less than two years will always be upheld.

The geographic parameters will vary depending on the nature of business; a radius of a few miles around a pizza parlor may be overbroad, while an entire metropolitan area may be allowed in more specialized fields.

Specifying an entire state or country, except in rare circumstances, would be counterproductive.  Note that although the form recites that, “The Employee agrees the above restriction is reasonable as to length of time and geographical area and waives any objection thereto,” this sentence is designed to make it more difficult for an employee to later object to terms he or she previously agreed to in writing, but this language may be disregarded or given minimal weight by any particular judge or jury.

In most states and in most instances, the rules will be applied more stringently against employers in an employer-employee context, and less so in other contexts.

Some employers utilize a California non-compete agreement, even where the business using them knows there is little chance it will be enforceable if challenged, the reasoning being that they hope the employee signing will be ignorant of the true level of enforceability of the agreement and will believe he or she is bound by it and act accordingly.

This is, of course, a questionable tactic, because all contracts are supposed to be signed in good faith and, of course, if challenged, an agreement that otherwise might be salvageable, or a case that might otherwise be won on other grounds, may result in a courtroom loss for the employer who implemented the questionable agreement, because judges and juries tend to find a way to rule against what they perceive to be the “bad guy” and juries also often prefer the “little guy” over the business person.