Christopher Skorina Business Law Blog on Lawyers.com

In California, covenants not to compete are generally unenforceable, even when they are narrowly drafted and leave a substantial portion of the market available to the affected person.   The rule invaliding non-compete covenants was adopted in 1872 and is now found in California Business & Professions Code Section 16600.  That section provides, "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

Because this rule is firmly entrenched in California law, litigation in this arena has focused on the scope of various exceptions to the rule.  These exceptions uphold the validity of non-compete agreements in certain cricumstances.   The exceptions are: (i) when a person sells the goodwill of a business; (ii) when a restrictive covenant is used to protect the employer's trade secrets; and (iii) when in connection with dissolution of a partnership or LLC a partner or LLC member agrees not to conduct a similar business as the soon to be dissolved enterprise. 

Perhaps the most relied upon exception to the general rule is the trade secrets exception.  A recent case, however, suggests employers must not be overly optimistic that the exception will be found applicable.  In Dowell v. Biosense Webster, Inc., 179 Cal.App.4th 564, 102 Cal.Rtpr.3d 1 (2009) the court of appeal held that noncompete and nonsolicitation provisions in an employment agreement were facially void despite the employer's claim that "they were tailored to protect trade secrets or confidential information, and as such satisfy the so-called trade secret exception" to the general rule of unenforceability.    The Dowell court stated that in light of a recent state Supreme Court decision in Edwards v. Arthur Anderson LLP, 44 Cal.4th 937, 946 (2008) (holding that California does not recognize a "narrow restraint" exception to the general rule of unenforceablity), it "doubt[s] the continued viability of the common law trade secret exception to covenants not to compete."   The Dowell court stopped short of reaching that issue and held the contractual provisions before it were unenforceable because they were "not narrowly tailored or carefully limitd to the protection of trade secrets, but are so broadly worded as to restrain competition." 

The language of the many opinions on this issue affords much ammunition to both employers and employees.   Whether the Dowell and Anderson cases signal the end to the exceptions is yet to be determined.   For present purposes, parties seeking an interpretation of their contract or that are about to draft a contract containing a covenant not to compete, are advised to seek the advice of experienced counsel.