Blurred Lines: The Enforceability of Non-Compete Agreements in California

California Business & Professions Code section 16600 invalidates agreements not to compete. However, in Techno Lite, Inc. v. EmCod, LLC, 44 Cal.App.5th 462 (2020), the Court ruled that section 16600 does not apply to an employee’s promise not to compete against his current, as opposed to former, employer.

Scott Drucker and Arik Nirenberg were salesmen for Techno Lite. They formed Emcod because they feared Techno Lite would go out of business due to financial troubles. Techno Lite’s owners discovered Emcod but allowed Drucker and Nirenberg to continue operating Emcod while working for Techno Lite because Drucker and Nirenberg promised not to compete with Techno Lite.

Techno Lite discovered Drucker and Nirenberg were competing with Techno Lite despite their promises. Drucker then offered to buy Techno Lite but the parties were unable to agree on terms. Drucker and Nirenberg thereafter resigned from Techno Lite. Techno Lite sued them a month later for “siphoning off accounts of Techno Lite’s and diverting the business of their employer to their own company, Emcod.”

The trial court found that Drucker and Nirenberg committed fraud by breaking their promises not to compete with Techno Lite and awarded Techno Lite compensatory and punitive damages. Drucker and Nirenberg appealed arguing that their promises not to compete were void pursuant to Section 16600.

In affirming the trial court’s decision, the court of appeal held that Section 16600 invalidates agreements that interfere with an employee’s ability to compete with an employee “after” his or her employment. But California law does not authorize an employee to transfer his loyalty to a competitor during his employment. The court of appeal could not find any authority invalidating an agreement not to compete with one’s current employer while employed by that employer. “Section 16600 is not an invitation to employees to bite the hand that feeds them.”