Generally Unenforceable
As a general rule, a non-compete agreement in an employment contract or a severance agreement is void as against public policy.
California Business and Professions Code Section 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.”
The rationale behind this law is simple -- it is the public policy of the State of California that its citizens should have the right to pursue any employment and business opportunity of their choice.
One California court has stated the following: “California courts have consistently declared [California Business and Professions Code Section 16600] an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice. Section 16600 has specifically been held to invalidate employment contracts which prohibit an employee from working for a competitor when the employment has terminated, unless necessary to protect the employer's trade secrets. The corollary to this proposition is that [a competitor] may solicit another's employees if they do not use unlawful means or engage in acts of unfair competition.”
Because a non-compete agreement imposed by an employer on a former employee is void, an employee has the right to conduct business in competition with their former employer. An employee can even seek to do business with the companies and/or individuals who had done business with their former employer. However, any competition with a former employer's customers must be conducting fairly and legally (i.e. an employee cannot steal and use their former employer's trade secrets and/or customer lists).
A provision in an employment contract or severance agreement that penalizes an employee (i.e. causes an employee to forfeit pension rights) for competing against their former employee will also be deemed a void non-compete agreement.
When Are the Limited Times When a Non-Compete Agreement May Be Enforceable?
A non-compete agreement may be enforceable in the following situations:
-
After an individual sells the goodwill of a business.
-
After a shareholder sells or disposes of their ownership in a corporation.
-
After a partner withdraws from a partnership.
-
After a partner disposes of their partnership interest.
To be enforceable, a covenant not to compete must be reasonable in scope. This means that a covenant not to compete must not be unnecessarily long in terms of time or unnecessarily large in terms of territory.