Historically, California courts viewed covenants as not competing with unlawful restraints of trade. Eventually, California courts began to enforce ancillary restraints on competition, such as that incident to employment or partnership agreements, under the rule of reason. The rule of reason states that a limited restraint on competition is valid when the restraint is reasonable. A restraint is reasonable if it is necessary to protect an employer's legitimate interest.
California courts thus enforce non-competition agreements, but only if they are ancillary to another agreement, the employer has a protectable business interest and the restriction against the competition is no greater than that necessary to protect the employer's legitimate business interest.
Ancillary to Another Agreement
California courts will not enforce a stand-alone non-competition agreement. Instead, California courts only enforce the restriction against the competition, if they are a part of or ancillary to another the agreement, such as an:
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- an employment agreement,
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- a contract for the sale of a business,
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- a stock buy/sell agreement or
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- an independent contractor agreement
California courts review non-competition agreements in an employment agreement with "strict" scrutiny but take a more lenient approach to restrictions contained in a contract for the sale of a business.
Legitimate Employer Business Interests
California courts recognize the following employer business interests as legitimate:
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- customers
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- trade secret and proprietary information and
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- goodwill with customers, agents, and vendors.
California courts will not enforce non-competition agreements whose only purpose is to eliminate ordinary competition.
Reasonable Restrictions
Non-compete covenants are reasonable if the restrictions are limited by:
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- duration
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- geographic scope or
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- customer relationships.
Reasonableness is a fact-intensive inquiry that depends on the totality of the circumstances. California courts balance the employer's need to protect its business interest against hardship to the employee and the likely injury to the public.
Non-competition agreements that restrict physicians and lawyers from accepting patients or clients could injure the public or the public's right to choose their medical or legal professional. Valley Med. Specialists v. Farber, 982 P.2d 1277, 1281-1282 (Ariz. 1999). California courts will not enforce such restrictions if the injury to the public outweighs the employer's business interest. In addition, by California statute, "broadcast employers" cannot require a current or prospective employee to agree to a non-compete clause. Ariz. Rev. Stat. 23-494.
Judicial Modifications of California Non-competition Agreements
California courts will "blue pencil" overly broad restrictions, but only if the agreement is divisible, as evident from the terms of the agreement. If the agreement is divisible, a California court can sever the unreasonable restriction. California courts will not rewrite the parties' agreement to remove an offensive restriction and replace it with a less restrictive one.
Although California courts will not rewrite the parties' agreement, a federal court applying California law upheld the party's prior agreement to abide by lesser, or "step down," restrictions. Compass Bank v. Hartley, 430 F. Supp. 2d 973 (D. Ariz. 2006).
A consequence of Breaching an Enforceable Non-Competition Agreement
An employer who proves that an employee breached an enforceable non-competition clause can:
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- recover its losses, even if the amount is uncertain;
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- obtain an injunction, and
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- extend the duration of a breached non-competition restriction.
Attorneys Fees
California revised statute section 12-341 allows a court in "any contested action arising out of a contract" to award the successful party reasonable attorney fees to mitigate the burden of the expense of litigation to establish a just claim or a just defense. The attorney fee the award must be made by the court and not the jury and need not equal to or relate to the attorney fees actually paid. However, the award cannot exceed the amount that the prevailing party actually paid or agreed to pay.
If a party to a California non-competition case proves with clear and convincing evidence that:
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- the claim or defense constitutes harassment,
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- is groundless and
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- is not made in good faith.
In making the award, the court may consider any evidence it deems appropriate and shall receive this evidence during a trial on the merits of the cause, or separately, regarding the number of fees that are in the best interest of the litigating parties.
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