Avoiding the ban on noncompetes: Is it possible?

California's disfavoring of covenants not to compete is no secret. Business and Professions Code Section 16600 states it plainly enough: "[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." This belief in employee mobility was recently underscored by the case of WeRide Corp. v. Kun Huang, 5:18-CV-07233-EJD (N.D. Cal. Apr. 1, 2019), which held unlawful nonsolicitation agreements of former employees, often thought of as the last bastion of anticompetitive behavior allowed. As a result of California's general prohibition on noncompetes, many out-of-state employers have included in their agreements with California employees choice-of-law clauses of states allowing noncompete provisions.

Recently, a Delaware-based company succeeded in such an effort in NuVasive v. Patrick Miles, 2017-0720-SG (Del. Ch. Sept. 28, 2018). In NuVasive, the Delaware Court of Chancery did an about face from its 2015 decision in Ascension Insurance Holdings LLC v. Underwood, 9897-VCG (De. Ch. Jan. 28, 2015), and upheld a Delaware choice-of-law provision in an employment agreement between a Delaware employer and a California employee, ultimately recognizing the enforceability of the noncompete. Critical to the court's decision was its perception that California's public policy had softened toward noncompete provisions in light of the California Legislature's passage of California Labor Code Section 925, which went into effect on Jan. 1, 2017.

Ironically, the Legislature enacted Section 925 to curtail the use of forum selection and choice-of-law provisions in employment agreements to the advantage of out-of-state employers and to the disadvantage of California employees. The statute prohibits employers from requiring employees to agree to provisions that "deprive the employee of substantive protection of California law" or forum selection provisions as a condition of employment by imposing restrictions on the use of choice-of-law clauses. The exception, however, is where the employee specifically negotiated the provision and was represented by counsel. Any provision that violates Section 925 is "voidable by the employee."

While the Delaware Court found that Section 925 "broadly conveys" California's public policy interest in "preventing contractual circumvention of its labor law," the court nonetheless sided with the employer finding Section 925 (which was not even applicable to the pre-2017 employment agreement at issue) reflected a tolerance for noncompetes in certain situations and thus a weakening of the otherwise firm California public policy prohibiting noncompete agreements. The NuVasive court stated:

"[California's Legislature] has recognized that in the limited subset of cases where the inequality of bargaining strength of the parties to an employment contract is buffered by the employee being represented by independent counsel, and where counsel participated in negotiation of the terms of a choice of law provision, California's interest in freedom of contract outweighs interest in freedom of employment."

There are some risks to relying on NuVasive. One obstacle is Business and Professions Code Section 16600 which makes clear that noncompetes are almost never allowed in California and against public policy in this state. Another is the trend reflected in the recent attacks on employee nonsolicitation clauses, which in the past have been considered a meaningful safe harbor of protection for employers seeking to protect proprietary information and workforces from corporate raiding. AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., 28 Cal. App. 5th 923, 935-36 (2018) (nonsolicitation clauses are void under Section 16600); Barker v. Insight Glob., LLC, 16-cv-07186-BLF (N.D. Cal. Jan. 11, 2019) (same); WeRide Corp. (same). Furthermore, there is the nothing in the legislative history of Section 925 to indicates a specific intent on behalf of the Legislature to depart from California's long-held policy against noncompetes clauses. To the contrary, it affirms the Legislature's understanding that existing California law made "other employment contract provisions, such as non-compete clauses, void or voidable as against public policy." It could be that the Legislature simply did not consider this consequence of the statute, which it actually enacted to encourage the application of California law rather than the opposite.

Employers should tread cautiously until the California courts weigh in on this issue. 

This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.