Employees' Promise Not to Compete with Current Employer Is Enforceable

A California law that generally makes noncompete agreements unenforceable does not extend to an employee's promise not to compete against his current—as opposed to former—employer, a California appellate court ruled.

Section 16600 of the California Business & Professions Code provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void."

In upholding a fraud judgment against two former employees who broke a promise not to compete against their then-employer, the appeals court noted that Section 16600 "is not an invitation to employees to bite the hand that feeds them."

The two employees worked for Techno Lite, which sold lighting transformers. After the company began experiencing financial difficulties, the employees started a similar side business while still working for Techno Lite.

When the owners learned of the employees' side business, they confronted the workers but allowed them to remain employed after they promised that their business would not compete with Techno Lite's. The employees, however, broke their promise by soliciting and selling to Techno Lite customers.

After one of Techno Lite's owners died, one of the competing employees offered to buy the company from the two surviving owners. When the parties could not agree to terms, the two employees left the company.

[SHRM members-only HR Q&A: Can an employer make noncompete and confidentiality agreements a condition of employment for current employees?]

A month after the employees resigned, Techno Lite sued them for misappropriation of trade secrets and fraud, among other claims. The trial judge rejected Techno Lite's claim that the employees had misused the company's trade secrets in their competing business by using a customer list to generate sales. Techno Lite admitted its customer list had been prominently and publicly displayed for years on the company's website. Therefore, the court said, the customer list could not be considered a trade secret.

The fraud claim was based on the allegation that the employees broke their promise not to compete with Techno Lite during their employment with the company. The employees relied on Section 16600 as a defense to this claim, arguing that their promise not to compete with their employer was void and so they could not have committed fraud in violating it.

The trial court rejected the employees' defense, ruled that they had engaged in fraud and awarded Techno Lite $87,963 in damages. The employees appealed, and the appellate court affirmed the judgment.

Valid Promise Not to Compete While Employed

The appeals court examined prior California decisions in cases where workers had competed against their current employer. Those cases focused on the duty of "undivided loyalty" that California employees owe their current employer.

The court found no authority invalidating an employee's agreement not to compete with his or her current employer.

The court explained that the policy behind the statute is to ensure that employees retain the right to pursue lawful employment, not to immunize current employees who transfer their loyalty to a competitor. Employees can seek other employment while still employed and even "prepare" to compete, but they may not actively compete against their current employer, the appeals court said.

Techno Lite Inc. v. Emcod LLC, Calif. Ct. App., No. B284989 (Jan. 21, 2020).

Professional Pointer: California still generally prohibits contractual restrictions on an individual's ability to compete against a former employer. As this case shows, however, California employers may legally prohibit competition during employment.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.