California has consistently upheld a public policy against any provision that seeks to restrain competition in the context of employment agreements. In perhaps the most notable case on the topic Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, the California Supreme Court, unanimously held that Business & Professions Code Section 16600 invalidated a provision in Edwards' employment agreement that restricted him from servicing customers and competing with Arthur Andersen following the termination of his employment. Notwithstanding the general premise that non-competition agreements are invalid, specific Sections of the B&P Code provide certain exceptions to California's policy against enforcing non-competition covenants which apply in limited circumstances.
There are two notable exceptions: Sale of Goodwill of a Business, and Dissolution of a Partnership or Limited Liability Company.
When a person who sells the “goodwill of a business” or otherwise disposes of his/her ownership interest in the business entity. This person may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business is sold. When the goodwill of a business is sold, non-competition covenants are generally enforceable because it would be "unfair" for the seller to engage in competition which diminishes the value of the assets he sold.
Other exceptions concern the dissolution of either a partnership or limited liability company. Again, in these circumstances, the person who is leaving the existing entity agrees that he or she will not carry on a similar business within a specified geographic area where the existing partnership or limited liability company is located.
Attempts to avoid California's policy against non-competition covenants by making contracts subject to the laws of a jurisdiction outside of California often fail. Typically, California courts will enforce a contractual choice of law provision if the chosen state has a substantial relationship to the parties or their transaction, or if there exists any other reasonable basis for the parties' choice of law, unless, the chosen state's law is contrary to the fundamental public policy of California.
If you are uncertain whether a clause in an employment agreement is enforceable in California, contact our office for a free evaluation of your specific situation.