The California Business and Professions Code prohibits contracts that serve to restrain trade. One such restraint that may be common in other states but is illegal in California is a non-compete clause in an employment contract. Under such a clause, the employee is typically prevented from working for a competitor for a period of time after leaving the employer with whom the contract was made. Many California employers may not be aware that such an arrangement is prohibited and unenforceable.
Often, however, companies doing business in California may be incorporated in other states. They may have offices and employees in California, or they may even just have employees in the state who work from their homes. This set of circumstances can muddy the water regarding the enforcement of a non-compete clause. A recent case involving a California resident who was employed by a Michigan-based company provides an example of how a non-compete clause may be treated by courts in California.
In the case, Sabol-Krutz v. Quad Electronics, Inc., the plaintiff had worked for a number of years for Quad, a Michigan-based company. She moved to California to establish residency so her daughter could enjoy in-state college tuition. She continued to work for Quad for a period of time before quitting to begin working for a direct competitor, also based in Michigan.
Quad sued the plaintiff in Michigan for breach of a non-compete agreement that she had signed upon employment. The plaintiff filed a separate suit in the United States District Court for the Eastern District of California, claiming that the non-compete agreement was invalid due to her residency in California. The court denied this portion of the plaintiff’s suit for several reasons.
First, the agreement had been executed in Michigan at the time of her employment. She worked for a number of years there under the contract. Second, she did no meaningful amount of business with California customers on behalf of Quad both before and after her move there. Third, California had an interest in applying Michigan law in the matter because to do otherwise would discourage companies in other states from allowing employees to move to California for fear that their non-compete agreements might be voided.
Sacramento, CA 95821