Non Competition Clauses Illegal in California

Overview: Non competition clauses—where an employee or franchisee or anyone else signs an agreement not to compete after leaving—with few exceptions, are  illegal in California, yet many employers and businesses make their employees sign agreements that they will not compete after they leave.  After the case of U-Haul v Robinson, that practice should slow down as trying to enforce an illegal no compete clause may get you sued,  learn all about it in the Law Review.

 

If your business makes employees, franchisees or anyone else sign a non competition clause – preventing them from competing with your business after they leave – you better read this Law Review.

Non competition clauses are fairly common, but be forewarned as this Court of Appeal wrote, “Covenants not to compete are, with limited exceptions, illegal under California law.”

U-HAUL

U-Haul signed a dealer contract with Leigh Robinson in Fairfield, California, where Robinson agreed he would rent U-Haul vehicles and equipment at his facility and the parties would share the rental income. U-Haul agreed to advertise Robinson’s U-Haul rental location in the Yellow Pages.  You remember them, right?

Here is where the problem starts. U-Haul’s standard dealer contract includes a “Non competition Covenant” prohibiting Robinson from competing with U-Haul by working with competitors while the Yellow Page ad remained in print.

For five years the business arrangement worked splendidly, but ended when Robinson sent a letter to U-Haul terminating their dealer contract. A few days later he opened a Budget Rental Truck dealership at his location. U-Haul wrote a letter threatening to enforce the non competition language and prevent Robinson from competing, then sued Robinson for violating the covenant.

CONTRACT TO MISLEAD PEOPLE

Two lawsuits and counter lawsuits later, the trial court ruled, coming down hard on U-Haul:

“First off, the clause is void and unenforceable as a matter of law. Business and Professions Code Section 16600…predated these events herein by many, many years. Their only reason to put a void contract clause in a contract is to mislead people…you do that so that you can cause somebody to think that that clause is, in fact, valid when it isn’t. So it is void and unenforceable as a matter of law.”

Take away point: If you are using non competition clauses in your contracts, make sure they are enforceable or you risk getting sued.

U-HAUL SUED FOR ITS NON COMPETITION CLAUSE

Robinson, perhaps emboldened by the trial court ruling, sued U-Haul and presented evidence of four other lawsuits that had been filed in California by U-Haul against its former dealers attempting to enforce the (illegal) non competition covenant.

In the end, U-Haul’s non competition covenant was ruled unenforceable.  U-Haul was ordered to pay $834,000 for Robinson’s attorney’s fees under what is known as the private attorney general doctrine.

A court may award attorney’s fees to a successful party who enforces an important right “affecting the public interest,” not just their own case.

The Court of Appeal found Robinson had enforced “an important right affecting the public interest, insofar as it furthered the strong California public policy in favor of free markets and against restraint of trade…a significant benefit…on the general public.”

NON COMPETE SOMETIMES LEGAL

The most common circumstances when a non competition clause can be legal include:  On the sale of a business or on the dissolution of a partnership or limited liability company.

 

Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada.  Jim’s practice areas include:  real estate, development, construction, business, HOA’s, contracts, personal injury, accidents, mediation and other transactional matters.  He may be reached at porter@portersimon.com or www.portersimon.com.  

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The content contained and opinions expressed in this blog are solely those of the author. This blog contains content and opinions concerning the law generally, and is not intended to constitute legal advice or to create any attorney‑client relationship with the reader. The reader should consult with an attorney about any specific legal issues prior to embarking on any course of action or inaction involving legal matters.