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A Story, Short & Sweet, About Covenants Not to Compete

Business lawsuits can grind on for a long time, and become very expensive. While many lawyers like that, most clients prefer something short, and preferably very sweet, in the sense of winning at the end. Twice, though, I have been involved in cases that were short and sweet for our clients. The area of law has to do with covenants not to compete.

A covenant not to compete is a promise that after employment is done, the employee promises not to compete with the employer. Usually there is a time period and a geographic or industry boundary involved. Many states allow covenants not to compete between employers and employees. However, while it allows such covenants when the goodwill of a business is sold,* California explicitly forbids such covenants between employers and employees: “. . . . every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” California Business & Professions Code section 16600.

Many salespeople start their careers in states that allow covenants not to compete, and sign contracts that require them to promise that once the employment ends, they will not compete with the employer for a certain period of time. Sometimes, those salespeople are transferred to California, the single largest state by population. California courts will not enforce covenants not to compete. In contrast, the courts in the state where the agreement was signed will likely enforce the restriction. The race to the courthouse will likely determine who wins.

What To Do? if you are an employee who signed such a covenant in another state, but wants to compete here in California? Before leaving your job, you need to consult with counsel about your options. One likely option is to file a declaratory relief lawsuit here in the state of California, thereby reserving jurisdiction for California. Declaratory relief actions seek to have a court “declare” the contractual parties’ rights and obligations; there is no requirement that one side be damaged. California courts have often declared that they will enforce California’s strong public policy in this matter, even with a contract that requires using the home state’s law (a confusing melange called “choice of law” principles.)

Both times when our clients did this, the other side was very confident in their initial phone call. They thought the had both the facts (the contract) and the law (their home state’s law allowing covenants not to compete) on their side. In both cases, they soon abandoned their opposition to our case, once they realized what California law had in store for them. There’s an added bonus. Since many such employment contracts require that the losing party pay the prevailing party’s attorneys’ fees (usually a one-sided contractual element in favor of the employer), the employer has extra incentive to give up quickly, before the employer is paying for two sets of attorneys.

The Small Print. Of course, there are limits to this. Using a former employer’s trade secrets is forbidden just about everywhere, and especially here in California. See California Civil Code sections 3426.1 to 3426.11. Being allowed to compete is not a license to steal. Consult with your counsel to make sure that you scrupulously follow the law in this area.

Court cases can be long and expensive. California cases about covenants not to compete, however, can be short and sweet – for the former employee.

*When a business is sold, the buyer rarely wants to see the seller stay in the same area and industry, so that the seller can continue doing business with the seller’s original customers. Buyers therefore usually want sellers to stay away from competing for some period of time, to allow the customers a chance to transfer their loyalties to the buyer. The California Legislature recognized that this is in the interest of sellers, who are being compensated through the sale for this.

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