Often California courts will not enforce a covenant restricting a person or entity from competing, however there are some circumstances when this type of restrictive covenant will be enforced in the state of California, despite the common perception that California courts will not enforce such a covenant.
The statute that makes these restrictions unenforceable has some exceptions. A person who sells their interest in a business may agree with the buyer not to open a similar business in a specific area where the business is sold as long as the buyer carries on the same type of business that was originally sold. In this type of circumstance which applies to a partner, LLC member, or a shareholder, a non-compete clause is enforceable.
Non-compete restrictions regarding employer-employee relationships are enforceable during the term of a contract or length of employment. If a person is employed with a company and has signed such a contract, that person promises he will not become interested in another company who conducts business which is similar to the employer's company. Under the terms of most employment, an employer is entitled to utilize their employees in the best interest of the company with "undivided loyalty". Under these contractual conditions the employee owes his employer a "broad duty of loyalty".
Although California has a fundamental policy against non-compete clauses, some considerations must be taken into consideration, including cases in which another state's law comes into play.
The Court of Appeal considers that every citizen of California has the right to pursue employment of their choosing. Employee's decisions to transfer to a different company or better their circumstances are paramount to the business interests of their employers. The state has a strong interest in protecting the freedom of employees to move from one business to another in California-based businesses to work in California. California businesses will be able to compete for the best employees to work for them, this is why sometimes these laws are unenforceable. Every case is considered on an individual basis to determine whether these clauses are enforceable or not.