Employers operating in California should all be familiar with California Business & Professions Code Section 16600, which prohibits non-compete agreements as against public policy. Except for non-compete agreements arising out of the sale of a business or dissolution of a partnership, California courts are loathe to uphold provisions of an employment agreement that constitutes a restraint on the pursuit of a lawful profession. However, California law is generally the exception rather than the rule. With California continuing to act as a magnet for qualified employees from around the country, the application of Section 16600 to out-of-state non-compete agreements is an important consideration for any California employer looking to siphon talent from its out-of-state competitors.
First and foremost, a California employer needs to familiarize itself with a potential employee’s contractual relationship with his or her former employer. If a non-compete agreement exists, the employer should not assume Section 16600 will trump or that his prospective employee is in the clear. The analysis must go a step further and depends largely on the choice-of-law state’s application of the contractual choice-of-law provision in the employment agreement versus the deferential provisions of Restatement (Second) of Conflict of Law Section 187(2), which gives significant weight to the employee’s contacts with California in determining whether to apply California law. In applying Section 187(2) to out-of-state non-compete agreements, California courts have invalidated these provisions in situations where a California employer has contracted with an employee to provide services in California, regardless of whether that employee lives in California or where that employee’s services are not rendered exclusively within the state. (See Application Group v. Hunter Group (1998) 61 Cal. App. 4th 881.)
California courts have historically been quick to protect the fundamental public policy that is codified in Section 16600. However, the practice of California court’s issuing injunctions prohibiting enforcement actions in other states has been severely curtailed by the California Supreme Court’s ruling in Advanced Bionics Corporation v. Medtronic, Inc. (2002) 29 Cal.4th 697. While the California Supreme Court agreed that California has a strong interest in protecting its employees from enforcement of non-compete agreements, the Court found that, based largely upon the principle of comity, this interest was not strong enough to permit issuance of injunctive relief to cut off court actions in other states. Considering this ruling, a California employer needs to be mindful of the very real danger of out-of-state enforcement actions filed in response to a California action. The first court to reach a judgment will likely determine whether a non-compete agreement will be enforced.
Of course, the mere fact a non-compete agreement may be enforceable against a prospective employee in California does not mean that employee is barred from taking employment with a California employer. In many states that allow non-compete agreements, the agreement itself must be reasonable in time and scope. If the prospective employee’s non-compete agreement is without limitation as to geographic area, time, or in its definition of “competition,” there is a chance the clause will not be enforced even in the foreign jurisdiction. California employers would be wise to have their counsel review the prospective employee’s agreement through the lens of the foreign law to determine whether there is a founded cause for concern in the first place.
In this increasingly competitive job market, California employers must be mindful of the potential ramifications of out-of-state non-compete agreements. While the best defense against litigation is to avoid employees with contractual “baggage,” it is often the brightest and most talented candidates who will have been pressured into entering such agreements by their former employers. California employers need to carefully evaluate the risks and benefits of hiring such a candidate and should in any event retain an experienced employment law attorney to guide them through the varied and complicated scenarios that may result from such a hire.
