California’s prohibition on covenants not to compete is well established.  The statute that reflects this public policy, Business and Professions Code §16600 generally permits such covenants only in narrowly prescribed circumstances.  Those exceptions are all identified by statute at Business and Professions Code §§16601, 16602 and 16602.5.  These exceptions permit covenants not to compete when the owners of a corporation, partnership or LLC  agree to such restrictive covenants upon the occurrence of certain events.  Except for such ownership related transactions, California law makes covenants not to compete unenforceable.  

Except in the narrow circumstance where an employee is utilizing confidential or trade secret information to solicit a former employer’s customers, covenants not to solicit customers generally fall under the same prohibition; they are void.  Sometimes referred to as the “trade secret” exception, I don’t view it as an exception to the rule at all.  California law imposes an independent obligation on current and former employees (or for that matter anybody) not to use their employer’s, former employer’s or anybody else’s trade secret information in a way that violates the provisions of the California Uniform Trade Secrets Act.  

But there is a set of circumstances that can arise that will allow a California court to enforce otherwise impermissible covenants not to compete. This “exception” arises as a result of differing law between the states and the federal overlay of constitutional principles that require each state to respect the judgments and law of sister states.  There are circumstances where a California court may find itself helpless to enforce California’s prohibition against covenants not to compete.  This situation can arise when an employer executes agreements with its workers containing choice of law and forum selection provisions requiring any dispute under the employment agreement (and the determination of the enforceability of a covenant not to compete against a California resident) be decided under the law and in the courts of another jurisdiction.  

A chain of state and federal cases shows the struggle over this issue.  In Advanced Bionics v. Medtronics (2002) 29 Cal.4^th 297, the California Supreme Court reversed lower courts, which had enjoined a court proceeding in another state, on the grounds that that state’s law was offensive to California’s fundamental public policy prohibiting covenants not to compete.  Several federal courts are in accord.  Google v. MicroSoft and Swanson v. T Mobile USA, both demonstrate the willingness of federal courts to find that choice of law and choice of forum provisions do not offend a fundamental California public policy.  

In Swanson v. T Mobile, a former employer sought to enjoin competing conduct by a former employee by injunction issued by a Washington State Court.  The former employee sought an injunction in California (where he was resident) based on the invalidity of the covenant.  The former employer removed to federal court and the federal court found that the forum selection provisions were enforceable and inoffensive to California public policy.  Although the Court noted that the former employee could urge the Washington Court to apply California law, there was no basis to enjoin the proceeding in the Washington Court.  At least as to employers with the reach and the resources to litigate in forums outside of California, the choice of law/forum “exception” can, at least practically speaking, swallow the no enforcement of covenants not to compete rule. 

Recently, the California legislative fixes to this “exception” have been proposed.  AB 267 (Swanson) would have made void an unenforceable as against public policy, any provision in an employment contract that requires an employee, as a condition of obtaining or continuing employment, to use a forum other than California, or to agree to a choice of law other than California law to resolve any dispute with an employer regarding employment related issues that arise in California.  While proposed, it appears that bill remains in committee in the California Legislature. 

Provisions of this kind continue to be a significant source of litigation.  Recently the brewers of Sam Adams beer sued a former employee and his new employer.  Both the former employee and the new employer (the Brewers of Anchor Steam Beer) are residents and operate in California.  The lawsuit was filed in Massachusetts and is based on an agreement containing a covenant not to compete and provisions that require that Massachusetts law be applied and that any litigation concerning it take place in Massachusetts.