ERISA and California Non-Compete Agreements

For longer than the last 100 years, the public policy of the State of California has been constant - non-competition agreements between employers and employees are void and unenforceable. Barring special circumstances, such as a sale of business equity, goodwill or a partnership interest, California's statutory and judicial attitude provides strong reassurance for the California employee seeking a new employment in a competitive industry. End of story? In modern practice, it's often not this easy.

Faced with intense competition in the high technology, financial services and consulting industries, California employers have sought various devices to effectively prevent the "knowledge worker" from being a competitive threat in the future. This article briefly looks at how non-compete users have adapted.

You're in California, but where's your agreement? As you might guess, other states do not share California's abhorrence of non-competition restrictions. You may work in California but your non-competition agreement chooses the laws of another state to govern its' enforceability via its "choice of laws" clause. Though California Courts may seize jurisdiction of such an agreement in order to protect its' citizens, there are cases where our Courts have given deference to enforcement actions started in other State Courts. Hence, you may find yourself in a race to the California courthouse.

You've agreed to resolve any dispute…how? If you've agreed to mandatory binding arbitration you may have multiple battles to wage. Generally, binding mandatory arbitration can be enforced, and when used in a non-competition agreement it's intended to avoid California law and Courts, (as above). This may or may not be enforceable; you'll have a chance to argue your objections in court

Is this about your future employment, or future money? Modern non-competes' extract a penalty, or a forfeiture, for violations. As discussed above, other States may conclude this is not such an unreasonable contract term. To loosely paraphrase one such Court, "It is one thing to tell a former employees they cannot compete against the employer in their chosen profession, it's quite another to enforce a deferred compensation penalty for their decision to do so."

Is your agreement controlled by Federal laws? ERISA, the federal laws pertaining to retirement and compensation plans, may pre-empt State law. Creative plan design may attempt to pull a non-competition agreement and "bad boy" or forfeiture clauses within Federal law statutory jurisdiction. Again, this may or may not work; you'll have a chance to argue the matter in court

Employment freedom and your anticipated monetary cost involve more than a blanket assumption about the enforceability of any particular non-compete agreement. Victory might go to the party that acts first and decisively. The right strategy is the one developed in partnership with knowledgeable legal counsel.