California employers got a win with a recent court decision that an employee’s promise not to compete during employment is enforceable under California law, in the case of Techno Lite, Inc. v. Emcod, LLC (Cal. Ct. App. (2d Dist.), Case No. B284989).
Techno Lite, Inc. v. Emcod, LLC
The employer, Techno Lite, sold lighting transformers. After Techno Lite started experiencing financial hardships, two of its employees started a similar side business while still working for their employer.
When Techno Lite's owners learned of the side business, they confronted the workers but allowed the pair to remain employed in light of the employees' representation that the side business would not compete with Techno Lite. But the employees broke their promise and started competing by selling to Techno Lite customers and soliciting those customers away from Techno Lite.
Techno Lite sued the employees for fraud and other claims, alleging the employees broke the promise not to compete during employment. The employees tried to use California Business & Professions Code Section 16600 as a defense to invalidate their prior promise.
Section 16600 – the law that is used to invalidate post-employment non-compete agreements in California except in narrow circumstances – 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."
To read more about Section 16600, see our prior advisory here.
Limits on California Non-Compete Laws
But, Section 16600 does have limits. While Section 16600 "has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee's ability to compete with an employer after his or her employment ends," it "does not affect limitations on an employee’s conduct or duties while employed."
The Techno Lite 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. While employees can seek other employment while still employed and even "prepare" to compete, they may not actively compete against their current employer.
California still generally prohibits contractual restrictions on a former employee’s ability to compete against a former employee. But, employers with California employees may prohibit competition during employment.
Employers may want to revisit confidentiality and other enforceable agreements with employees, to add restrictions during employment and specific remedies for breaches.