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California noncompete-clause ban now has narrow exception

California law is serious about protecting employees within its borders. To that end, Labor Code section 925, which became effective in 2017, explicitly provides that an employer, as a condition of employment, may not force employees who primarily work and reside in California to agree to resolve legal disputes arising out of their employment in California, in courts of a different state. The statute also provides that an employer may not deprive an employee of a "substantive protection" of state law in any dispute arising here.

One of the state's strong employee protections is its ban on the covenant not to compete or noncompetition clause, which is an employment contract term prohibiting an employee from working for a competitor for a set time period after leaving. 

Because many other states allow reasonable covenants not to compete, California employers have attempted to include choice-of-law provisions saying that the law of one of those states applies to the employment contract, which, if legal, could make the noncompetition restriction enforceable, according to an article in The National Law Review. The article's author concludes that these attempts have met with varying success and that Labor Code section 925 is a reaction to that uncertainty.

Door has opened slightly to noncompete clauses

Labor Code section 925 makes an exception if the employee is represented by a lawyer in negotiating two kinds of employment contract terms - a choice-of-forum clause or a choice-of-law provision. This means that the contract could provide that disputes between the employee and employer must be resolved in the courts of another state or under the laws of another state - terms which would otherwise be voidable by the employee as improper restrictions - as long as the employee's attorney negotiated these terms.

In other words, if the employee has an attorney to negotiate on his or her behalf, a noncompete clause could be valid in a California employment contract under the law of another state pursuant to a choice-of-law clause.

This is a complex area of California law and any employer contemplating whether to include noncompetition restrictions in its employment contracts along with choice-of-law or -forum provisions should speak with an experienced California employment lawyer for guidance and help drafting such an agreement.

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