One may be in breach of a non-compete covenant if he or she signed a written agreement not to compete and subsequently either 1) used a former employer’s trade secrets or customer lists to the former employer’s detriment; or 2) operated a business within the same, or within a specified, time and geographical area as a similar business that he or she sold to another. (Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401.)
ELEMENT 1: Valid Existing Contract
A plaintiff must allege a valid existing contract between the parties. (Alliant Ins. Services, Inc. v. Gaddy (2008) 159 Cal.App.4th 1292.)
Consideration is Necessary
A valid contract requires consideration. Consideration can be the employer’s agreement to hire an employee in exchange for the employee’s execution of a contract with a non-compete clause. (VL Systems, Inc. v. Unisen, Inc. (2007) 152 Cal.App.4th 708.)
Consideration in the Sale of a Business
In the sale of a business, the buyer’s payment for the business can be the consideration for the seller’s promise to not directly compete with the business as it was conducted at the time of the sale. (Fleming v. Ray-Suzuki (1990) 225 Cal.App.3d 574.)
ELEMENT 2: Valid Non-Compete Covenant
The non-compete covenant in the contract must be enforceable under California law. See Bus. & Prof. Code §§ 16600-16607.
Reasonable and Clear
At common law, a restraint against competition was valid to the extent it reasonably provided for the protection of a valid interest of the buyer from the seller; such rule of reasonableness in connection with the sale of business has been codified under Business and Professions Code §16601.
Refrain from Business in Specified Geographic Area
Under Business and Professions Code section 16601, it is reasonable and thus, allowable, for the seller of a business to agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business was sold so long as the buyer, or any other person deriving title to the business, carries on a like business there. Bus. & Prof. Code § 16601.
How to Determine Reasonableness of Non-Compete Covenant
Courts measure the reasonableness of covenants that tend to restrain trade by using a number of factors, including (1) appropriateness of the restraint in advancing the interest to be protected; (2) availability of less harmful alternatives; (3) nature of interest interfered with which covenant interfered; (4) intent of parties or tendency of restraint to create monopoly; and (5) social or economic justification for any monopoly if it does result. (Radiological Physics v. Hanford Cmty. Hosp. (2007) Cal.App.Unpub. LEXIS 10647 (citing (Webb v. West Side District Hospital (1983) 144 Cal.App.3d 946).)
Certainty of Non-Compete Provision
The non-compete provision must be certain enough to be enforceable. Bus. & Prof. Code § 16601.
Termination of Non-Compete Provision
The non-compete provision need not set forth a definite termination date if it clearly provides for a year to year term. Civ. Code §§ 1943, 1946.
In the employment context, covenants that are designed simply to prevent competition are per se unenforceable. (Quidel Corp. v. Superior Court (2019) 39 Cal.App.5th 530.)
With certain limited exceptions, a covenant that prevents a person from engaging in a profession, trade, or business is void. Bus. & Prof. Code § 16600.
A contract provision may be void as a partial restraint on one’s right to engage in business. (Ixchel Pharma, LLC v. Biogen, Inc. (2020) Cal.LEXIS 4876.)
Employment Restraints Violate Public Policy
Restraining an individual from seeking employment elsewhere violates public policy and constitutes an unreasonable burden on the employee. (Walia v. Aetna, Inc. (2001) 93 Cal.App.4th 1213.)
A covenant restricting at-will employees from providing traffic reporting services to any television or radio station for one year after termination was unenforceable. (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853.)
Anti-solicitation Covenants Are Void
Anti-solicitation covenants are void as unlawful business restraints except where enforcement is necessary to protect trade secrets. (Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425.)
Agreement Not to Use Confidential Customer List is Valid
An employee’s agreement not to use his employer’s confidential customer list to solicit customers for himself for one year after termination of employment did not prevent the employee from conducting the same or any other business for himself, and hence, was not void as having an unlawful object. (ReadyLink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006.)
In determining that it would not rewrite an illegal covenant not to compete by construing it as merely barring misappropriation of confidential customer lists and trade secrets, the court reasoned that to do so would undermine Business and Professions Code §16600. (Kolani v. Amitai Gluska (1998) 64 Cal.App.4th 402.)
Agreement Not to Use Confidential Customer List is Valid
A reasonable agreement not to use a confidential customer list is valid and enforceable. (ReadyLink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006.)
Protecting Trade Secrets
Non-competition agreements may be appropriate to protect trade secrets. (Edwards v. Arthur Andersen LLP (2006) 142 Cal.App.4th 603.)
Duration of a Restrictive Agreement Not Determinative of its Enforceability
The duration of a restrictive agreement is not determinative of its enforceability. Enforceability depends upon its reasonableness, evaluated in terms of employer, employee, and public. (Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268.)
Injunctive Relief and Treble Damages
Any party who successfully challenges an unlawful restrictive covenant is entitled to injunctive relief and is entitled to recover three times the amount of the actual damages, if any, and shall be awarded reasonable attorney’s fees together with the costs of suit. Bus. & Prof. Code § 17082.
Sale of a Business
In the sale of a business, a covenant not to compete will be enforced to the extent that it is reasonable and necessary to protect the buyer’s interest in terms of time, activity, and territory. (Fleming v. Ray-Suzuki (1990) 225 Cal.App.3d 574.)
Liberally Enforced Covenants
Covenants arising out of the sale of a business are more liberally enforced than those arising out of the employer-employee relationship. (Kohlweiss, Inc. v. Smith (2008) Cal.App.Unpub. LEXIS 626 citing (Monogram Indus., Inc. v. Sar Indus., Inc. (1976) 64 Cal.App.3d 692.))
ELEMENT 3: Breach of Contract
The plaintiff must show that the defendant breached the non-compete covenant. (Alliant Ins. Services, Inc. v. Gaddy (2008) 159 Cal.App.4th 1292.)
The plaintiff must show that the contract was, in fact, breached and that the defendant’s conduct was the cause of the breach. (Id.)
Franchisor Allowed to Place Competing Company Stores in the Market Area
A franchisor who granted a franchisee the exclusive right to use the franchisor’s trademark, trade dress, and a particular location (rather than any exclusive territory or market area) did not violate the franchise agreement by placing competing company stores in the market area. (Eichman v. Fotomat Corp. (9th Cir. 1989) 880 F.2d 149.)
Violation of a non-compete covenant may be specifically enforced by an injunction against breach. (NewLife Sciences, LLC v. Weinstock (2011) 197 Cal.App.4th 676.)
Plaintiff may recover at law for pecuniary loss proximately caused by defendant’s wrongful conduct; damages may include lost profits. (Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34.)
STATUTE OF LIMITATIONS
The statute of limitations for breach of a written contract is four years. Civ. Proc. Code § 337.
Restriction of Trade or Business
A defendant can argue that the contract is restraining him or her from engaging in a lawful profession, trade, or business and therefore should be void. Bus. & Prof. Code § 16600.
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