California Noncompete Law Limits Enforcement to Narrow Exceptions

A company cannot enforce an employee noncompete simply because it lasts six months, covers a small geographic area, or applies to particular competitors.

Section 16600 expressly invalidates employment noncompetes that fail to satisfy a statutory exception, regardless of how narrowly they are drafted.

The rule also applies to executives and highly compensated employees. Access to sensitive information, important customers, or business strategy does not independently justify restricting an employee's next job.

Businesses operating across several states should distinguish these requirements from the standards governing non-compete agreements in other jurisdictions.

Employers sometimes use customer nonsolicitation or confidentiality provisions instead of conventional noncompetes.

Courts may examine whether these terms unlawfully restrict a person's ability to pursue their profession. A customer restriction that prevents ordinary competition may raise concerns even when the agreement avoids the term "noncompete."

Confidentiality provisions require a separate analysis. An agreement addressing identifiable confidential information may be enforceable, but it cannot automatically prohibit employees from using their general professional knowledge and skills.

Section 16601 permits certain sellers to agree not to operate a similar business within a specified geographic area.

The exception covers qualifying transactions involving the sale of business goodwill, an owner's entire ownership interest, or specified transfers of operating assets or subsidiary interests.

The restriction must also relate to an area where the relevant business operated, and the buyer or successor must continue a similar business there.

A nominal ownership transfer or agreement labeled as a business sale does not automatically establish that the exception applies. The substance of the transaction matters.

Companies reviewing executive employment agreements should distinguish employment restrictions from obligations arising through qualifying ownership transactions.

Section 16602 permits qualifying restrictions connected to partnership dissolution or a partner's dissociation.

Section 16602.5 addresses comparable arrangements involving LLC dissolution or termination of a membership interest.

These exceptions require specific circumstances involving business ownership. They also impose geographic and continuing-business conditions.

An ordinary employee's resignation does not qualify merely because the person held a senior management position.

California Civil Code § 3426.1 defines trade secrets by their independent economic value from secrecy and the reasonable efforts taken to maintain that secrecy.

Depending on the circumstances, qualifying information may include proprietary formulas, confidential technical processes, or nonpublic business data.

However, information does not become a trade secret merely because an employer labels it confidential.

An employer alleging misappropriation must identify the protected information and establish the legal basis for its claim. Under Civil Code § 3426.2, courts may issue injunctions against actual or threatened misappropriation.

The federal Defend Trade Secrets Act provides a civil cause of action involving trade secrets related to products or services used, or intended for use, in interstate or foreign commerce.

Under 18 U.S.C. § 1836, federal courts may grant relief against actual or threatened misappropriation. However, federal injunctions cannot prevent a person from entering an employment relationship or conflict with applicable state restrictions on lawful work.

Conditions affecting employment must rest on evidence of threatened misappropriation rather than the information an employee merely possesses.

A dispute involving the Defend Trade Secrets Act therefore requires evidence of improper conduct, not simply proof that an employee joined a competitor.

Section 16600.5 prohibits employers from attempting to enforce agreements that are void under the relevant statutory chapter, including certain agreements signed or performed outside the state.

However, applying that protection in a dispute involving another jurisdiction may require additional analysis.

Relevant circumstances include the employee's work location, the employer's connections to the state, and the court hearing the dispute.

A contractual choice-of-law provision does not automatically eliminate statutory protections, but it may create issues that a court must resolve.

California Labor Code § 925 restricts certain employment provisions requiring employees who primarily reside and work in the state to litigate elsewhere or surrender substantive California protections.

The statute generally applies to qualifying contracts entered into, modified, or extended on or after January 1, 2017.

An exception applies when an employee was individually represented by legal counsel while negotiating the relevant forum or choice-of-law terms.

These requirements should not be confused with the separate rule invalidating unlawful noncompetes.

Section 16600.1 prohibits including employment noncompetes that do not satisfy a statutory exception. A violation constitutes an act of unfair competition under California law.

Section 16600.5 also prohibits entering into or attempting to enforce agreements that are void under the relevant statutory chapter.

Employees, former employees, and prospective employees may bring qualifying private actions seeking injunctive relief, actual damages, or both.

Prevailing claimants may recover reasonable attorney's fees and costs under the statute. Actual recovery depends on the applicable legal requirements and supporting evidence.

Section 16600.1 required qualifying employers to notify affected current employees and certain former employees employed after January 1, 2022, about void noncompetes by February 14, 2024.

The statute required individualized written notices delivered to specified addresses. This was a historical compliance deadline, not an annually recurring requirement.

When disputes arise, employees should preserve their agreements, relevant employer communications, and records identifying where they worked.

Employers alleging trade secret misappropriation should preserve relevant access logs, communications, and evidence of improper acquisition or disclosure.

Evidence of competition alone does not establish trade secret misuse.