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California Court Of Appeal Creates Significant Exception To Statutory Prohibition on Covenants Not To Compete.

On Behalf of | Nov 7, 2019 | Contract Disputes

Business and Professions Code section 16600 contains a short and simple prohibition on covenants not to compete, providing “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (emphasis added). In Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 955, the California Supreme Court, acknowledging the inflexible language of Section 16600, held “[n]oncompetition agreements are invalid under section 16600 in California, even if narrowly drawn.”

Notwithstanding the plain language of Section 16600 and the Supreme Court’s strong opinion in Edwards, the Court of Appeal in Quidel Corp. v. Superior Court (2019) 39 Cal.App.5th 530, held that “every contract” does not necessarily mean “every contract.” Instead, the court limited strict application of Section 16600 only to employment contracts, holding noncompetition agreements outside the employment context are enforceable if they do not negatively affect the public interest, are designed to protect the parties in their dealings, and do not attempt to establish a monopoly. It remains to be seen whether the California Supreme Court will reject Quidel Corp.’s dualistic approach to Section 16600. If the holding stands, however, then the Quidel the court opened the door to the enforcement of a wide-range of covenants not to compete outside of the employee-employee relationship.