California law strongly disfavors non-solicitation clauses, reflecting the state's deep commitment to employee mobility and open competition. Under California Business and Professions Code Section 16600, any contract that restrains someone from engaging in a lawful profession, trade, or business is generally void. This statutory provision reflects California's strong public policy favoring open competition and employee mobility. However, there are notable exceptions to this rule, which are crucial for legal practitioners to understand.
Key Case Law: AMN Healthcare and Edwards v. Arthur Andersen, LLP
Two pivotal cases illustrate the application of Section 16600: AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. and Edwards v. Arthur Andersen, LLP. In AMN Healthcare, the court invalidated a non-solicitation clause that restricted former employees from soliciting their former employer's clients. The court emphasized that such clauses are unenforceable unless they fall within a statutory exception.
Similarly, in Edwards v. Arthur Andersen, LLP, the California Supreme Court held that non-competition agreements are void unless they fit within a statutory exception. The court rejected the "narrow restraint" exception, affirming that Section 16600 invalidates any restraint on a person's ability to engage in their profession.
Exceptions to the Rule
While Section 16600 broadly invalidates non-solicitation clauses, there are specific exceptions where such clauses may be enforceable:
- Protection of Trade Secrets: Non-solicitation clauses may be upheld if they are necessary to protect trade secrets. Employers must demonstrate that the clause is essential to prevent the misuse of confidential information.
- Sale of a Business: Under California Business and Professions Code Sections 16601 and 16602, non-solicitation clauses may be enforceable in the context of the sale of a business. These provisions allow sellers to agree not to compete with the buyer, thereby protecting the buyer's investment.
- Dissolution of a Partnership: Section 16602.5 permits non-solicitation agreements in the context of partnership dissolution. This exception allows former partners to agree not to solicit the partnership's clients, ensuring a fair division of business interests.
Conclusion
California's restrictions on non-solicitation clauses are among the strictest in the country, and the consequences of getting it wrong can be significant. A clause that seems standard in other states may be completely unenforceable here, or worse, may expose your business to liability for requiring employees to sign it in the first place.
If you are an employer operating in California, now is a good time to review your employment agreements. Whether you are drafting new contracts, onboarding employees, or navigating a dispute with a former team member, having the right language in place from the start protects your business and keeps you on the right side of California law.
I help California employers review and update their employment agreements to make sure they are compliant, enforceable, and actually protective of your business interests. Schedule a consultation to get started.
Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.
