California Statute Does Not Void Promise Not to Compete During Employment

Non-Compete, California, Employment Agreements, Techno Lite, Emcod

Many believe that a non-compete agreement is never enforceable in California. A recent decision by the California Court of Appeal shows that there may be some protection afforded by such an agreement, at least as against competition during the employment relationship.

As the appeals court wryly notes, “Section 16600 is not an invitation to employees to bite the hand that feeds them.”

Defendants Form Side Business & Promise Not to Compete With Employer

Scott Drucker and Arik Nirenberg worked for Techno Lite, Inc., a company engaged in selling lighting transformers.  While Drucker and Nirenberg worked for Techno Lite, they also ran their own company, Emcod, LLC. Though Emcod also sold transformers, Techno Lite consented to Drucker’s and Nirenberg’s operating Emcod while working for Techno Lite, based on their promise that they would run Emcod on their own time, and that Emcod would not compete with Techno Lite.

Emcod in fact sold Techno Lite customers the same products Techno Lite sold, and also took steps to make sure Techno Lite did not discover this activity. Eventually it came to light Techno Lite filed a lawsuit.

Employer Files Suit After Learning Employees Sold to Common Customers While Employed

Following a seven-day trial, the court found for Techno Lite on claims for intentional interference with contractual relations, intentional and negligent interference with prospective economic advantage, fraud and unfair competition. The court found against Emcod, Drucker, and Nirenberg on their cross-complaint. An appeal followed, and one significant issue was whether California law invalidated the promise not to compete.

The appellants, Emcod, Drucker, and Nirenberg,  argued the trial court erred in holding them liable for fraud because the false promise on which the fraud was based was void as a matter of law. Specifically, appellants claimed that any promise Drucker and Nirenberg made not to compete with Techno Lite was void because, the covenant not to compete with Techno-Lite was contrary to public policy and in violation of the express provisions of California Business & Professions Code, Section 16600.

Appellate Court Hold Non-Compete Promise Not Void During Employment

The California Court of Appeal disagreed, drawing a distinction between competition during employment versus competition after the employment ended. The appeals court noted that 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.  However, the statute does not affect limitations on an employee’s conduct or duties while employed. While California law does permit an employee to seek other employment and even to make some preparations to compete before resigning, California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to the undivided loyalty of its employees.

The public policy behind Section 16600 is to ensure “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” It is not to immunize employees who undermine their employer by competing with it while still employed. No principle of California public policy authorizes an employee to assist his employer’s competitors; moreover, no firmly established principle of public policy authorizes an employee to become his employer’s competitor while still employed.

Drucker and Nirenberg’s promise that Emcod would not compete with Techno Lite was not void, and Techno Lite was entitled to rely on it. Accordingly, the trial court did not err in finding appellants liable for fraud based on that false promise.

The case is TECHNO LITE, INC. v. EMCOD, LLC, et al. 44 Cal.App.5th 462 (Cal. Ct. App., 2020).

Michael R. Lied is a partner at Howard & Howard’s Peoria, Illinois office. He concentrates his practice in the areas of labor & employment law, and related litigation and immigration law, representing employers.

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