A contract says a departing employee cannot contact your customers or recruit your staff. Does that make the restriction enforceable? In California, usually not simply because the employee signed it. Non-solicitation clauses can violate California’s broad protection of lawful work and competition. This article explains the different rules for employment and commercial agreements, the limited statutory exceptions, and ways California businesses can protect confidential information without imposing an unlawful restraint.
California non-solicitation clauses in employment agreements
California Business and Professions Code section 16600 generally makes a contract void to the extent it restrains someone from engaging in a lawful profession, trade, or business, unless a statutory exception applies. In employment agreements, a short duration or limited customer list does not automatically save a restriction.
In Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, the California Supreme Court rejected a narrow-restraint exception and invalidated restrictions on an employee’s work for and solicitation of certain clients. Employers should not assume a customer non-solicitation clause is permissible merely because it stops short of banning all competition.
Employee recruiting restrictions also carry substantial risk. In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923, the court held an employee non-solicitation provision void as applied to nurse recruiters because it restricted their ability to solicit and recruit the nurses central to their profession. The decision is a strong warning against treating employee non-solicitation provisions as a safe alternative to noncompetes, although the California Supreme Court has not resolved the validity of every form of employee non-solicitation provision.
Sections 16600.1 and 16600.5 add restrictions and potential liability concerning unlawful employment noncompete agreements and other contracts void under the chapter. Section 16600.1 specifically addresses employment noncompete clauses and agreements, including a notice requirement for covered agreements. Section 16600.5 makes contracts void under the chapter unenforceable regardless of where or when they were signed. It prohibits employers from entering into covered contracts with employees or prospective employees or attempting to enforce them, and treats that conduct as a civil violation. Employees, former employees, and prospective employees may bring a private action for injunctive relief or actual damages, or both, with reasonable attorney fees and costs available to a prevailing employee. Signing a standard form does not resolve the enforceability issue.
Business-to-business agreements follow a different analysis
Not every non-solicitation clause in California appears in an employment contract. Restrictions between independent businesses require a different analysis.
In Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9 Cal.5th 1130, the California Supreme Court held that a rule-of-reason analysis applies to restraints in business contracts outside the employment context. That means a commercial restriction is not automatically void under section 16600 just because it limits some business activity.
This is not blanket approval. A clause between a distributor and supplier, for example, still needs review of its purpose, scope, competitive effects, and surrounding facts. Calling an employment restriction a “business agreement” does not change its substance. Review of business contracts should identify whose activity is restricted and which legal framework actually applies.
Statutory exceptions can permit limited restraints
California recognizes specific exceptions connected to ownership transactions and business dissolution. These can support restrictions that would ordinarily be impermissible in employment agreements, but only when the facts fit the statute.
- Sale of a business: Section 16601 permits certain restraints associated with a qualifying sale of goodwill or ownership interests, subject to statutory conditions.
- Partnership departure or dissolution: Section 16602 permits a partner, upon or in anticipation of a partnership dissolution or the partner’s dissociation, to agree not to carry on a similar business within a specified geographic area where the partnership business was transacted, while another partner or a person deriving title to the business or its goodwill carries on a like business there, subject to the statute’s conditions.
- Limited liability company departure or dissolution: Section 16602.5 provides an exception for specified LLC circumstances.
A stock award or small ownership stake does not automatically turn an employee’s departure into a qualifying sale. The transaction, ownership interest, geographic scope, and connection to the business being sold or dissolved all deserve careful review.
Protect trade secrets without banning ordinary competition
A void non-solicitation clause does not give a former employee permission to steal trade secrets. California’s Uniform Trade Secrets Act protects information that meets the statutory definition. Under Civil Code section 3426.1, the information must derive independent economic value, actual or potential, from not being generally known to the public or to others who can obtain economic value from its disclosure or use, and must be subject to reasonable efforts to maintain its secrecy.
A customer list is not automatically a trade secret. Even if individual names are publicly available, a nonpublic compilation containing purchasing patterns, pricing, or decision-maker information may qualify if the compilation meets the statutory economic-value and secrecy requirements. The distinction depends on the evidence.
Civil Code section 3426.2 permits injunctions against actual or threatened misappropriation of a trade secret, subject to statutory requirements and limitations. An injunction must be terminated when the trade secret ceases to exist, although it may continue for a reasonable period to eliminate a commercial advantage from misappropriation. In exceptional circumstances, future use may be conditioned on payment of a reasonable royalty instead of prohibited. The focus should be misuse of protected information, not ordinary competition or a former employee’s general knowledge and skills.
- Limit access to sensitive information based on job responsibilities.
- Use confidentiality terms that identify protected information without sweeping in public information or general skills.
- Document return or deletion of company materials at departure.
- Preserve evidence of suspicious downloads or transfers through lawful methods.
Review the clause before relying on it
For California businesses and individuals, the practical question is not simply whether a contract contains a non-solicitation provision. It is whether the restriction is lawful in its actual setting.
- Identify the relationship. Is this employment, a commercial arrangement, or a qualifying ownership transaction?
- Read the full restriction. Customer contact, accepting unsolicited work, and employee recruiting may each raise different issues.
- Separate competition from misconduct. A departing worker contacting a customer is not, by itself, proof of trade secret misuse.
- Review before sending demands. Threatening enforcement of a void employment restraint can create additional exposure.
Do not assume a severability clause, out-of-state choice-of-law provision, or employee signature fixes an unlawful restraint. Individuals receiving a demand should preserve the agreement and correspondence, avoid deleting relevant records, and seek advice before responding.
Talk to a California business attorney
Itkin Law offers a free consultation to discuss non-solicitation provisions, contract revisions, and disputes involving customers or confidential information. Schedule a free consultation or call (424) 603-8888.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. The law changes, and this article reflects the law as of its publication date. Every situation is different — contact us to discuss how the law applies to your exact circumstances. See our full disclaimer.
