Employers wishing to use choice of law clauses in their employment agreements to enforce non-compete provisions in California were recently put on notice that such efforts to circumvent California’s public policy in favor of employee mobility would not be enforced, and that placing a non-compete provision in an employment contract involving persons engaged in work in California will generate affirmative liability for unfair business practices under California Business and Professional Code § 17200 et seq. Under this code, an employer may face civil liability of up to five thousand dollars ($5,000) for each employment contract entered into that contains a non-compete provision meant to be enforced in California.
This affirmative liability was realized by the employer in Arkley v. Aon Risk Services Companies, Inc., a recent decision from the United States District Court for the Central District of California, which invalidated a non-compete clause in the employment contracts of three California employees who agreed to an Illinois choice of law provision in their contracts. Unlike California, non-compete provisions are enforceable in Illinois. Nevertheless, despite the fact that the employer was headquartered in Illinois and the employees in question had several other connections to that state, the court ruled that the covenants not to compete in the plaintiffs’ employment contracts were void and unenforceable, as “Illinois law [related to non-compete provisions] is contrary to a fundamental policy of California.” The Arkley court justified the ruling, stating that California has a “materially greater interest in protecting an employee’s right to mobility” than Illinois’s interest in fostering predictability and in protecting its “long tradition” of enforcing covenants not to compete. In addition to merely refusing to enforce the non-compete, the Arkley court found the employer affirmatively liable for an unfair business practice arising from the existence of the non-compete provision in the employees’ employment agreements.
Although Arkley involves employees who were residents of California, whose offices were in California, and who took on subsequent employment in California, the ruling has greater implications. Citing to a 1998 California Court of Appeals decision, Arkley opined that, in addition to protecting the interests of California residents, California also has an interest in protecting employees of California-based companies who “provide services in California, regardless of the person’s state of residence or precise degree of involvement in California projects.” Thus, if an employee provides services in California for a California-based company, California courts may strike down a covenant not to compete in that employee’s employment contract, and the employer may be subject to civil liability.
For further information on covenants not to compete and their enforceability in California, please contact one of Dorsey’s experienced California employment lawyers: Gary Gansle, Karen Wentzel, David Murphy, Mandana Massoumi or Gabrielle Wirth.
Non-Compete Provisions in California: Unenforceable and Affirmative Liability for Unfair Business Practices
July 26, 2012