Non-Competition Agreements , or covenants not-to-compete, are contracts between two parties who aim to protect the proprietary interest and good will of one of the parties. Such agreements can be between employers and employees, and also between two separate corporate entities. In general, the parties may include a non-compete provision in the contract to ensure that a party does not take advantage of protected information (e.g., trade secrets) for financial gain.
The California Business & Professions Code § 16600 establishes a strong presumption against agreements not to compete to protect citizens’ right to seek the lawful employment of their choice. According to section 16600, any such clause that restricts citizens’ right to engage in a lawful profession, trade, or business is void in California. However, according to sections 16601 and 16602.5, there are certain exceptions to the general rule. The majority of California courts follow the standard that unless an agreement not to compete fits squarely within one of these statutory exceptions, the agreement is void. Specifically, California courts will not enforce employment contracts that prevent employees from seeking work with competing firms or using non-confidential information that they gathered in the course of their employment. Unless such a provision goes to protect valid trade secrets, courts do not allow for such provisions in employment contracts. However, where former employees unlawfully utilize confidential information and engage in unfair competition to the disadvantage of a former employer, California courts will uphold non-competition agreements.
In the event that a covenant not to compete does fall within one of the statutory exceptions, both the buyer and the person gaining title or goodwill from the buyer have the right to bring an action to enjoin the unlawful competition. A partner to a business or any person gaining title to the business may also bring such an action. If the agreement not to compete is in writing, a complaining party has four years to bring suit. A statute of limitations prescribes how much time a party has to bring a suit against another party before losing the right to pursue such a legal claim. However, if the agreement not to compete is not in writing, the complaining party only has two years to bring a cause of action.
A party defending against a suit for the alleged breach of an agreement not to compete has several defenses available, depending on the nature of the suit. For instance, a party may assert that the agreement was illegal and therefore non-binding. Additionally, the party may assert that the agreement is not binding because there was a lack of consideration between the parties, thereby voiding the agreement.
If the complaining party suffers damages as a result of unlawful competition by a former employee, the complaining party may be able to recover such damages through a court order. The complaining parties will most often seek injunctive relief to compel the violating party to stop the unlawful activity. However, the damages available will depend on the individual facts of each case, and the overarching interests of the complaining party.