Jim Porter: Noncompetition clauses illegal in California (opinion)
If your business makes employees, franchisees or anyone else sign a noncompetition clause — preventing them from competing with your business after they leave — you better read this Law Review.
Noncompetition clauses are fairly common, but be forewarned as this Court of Appeal wrote, “Covenants not to compete are, with limited exceptions, illegal under California law.”
U-Haul signed a dealer contract with Leigh Robinson in Fairfield, California, where Robinson agreed he would rent U-Haul vehicles and equipment at his facility and the parties would share the rental income. U-Haul agreed to advertise Robinson’s U-Haul rental location in the Yellow Pages. You remember them, right?
Here is where the problem starts. U-Haul’s standard dealer contract includes a “Noncompetition Covenant” prohibiting Robinson from competing with U-Haul by working with competitors while the Yellow Page ad remained in print.
For five years the business arrangement worked splendidly, but ended when Robinson sent a letter to U-Haul terminating their dealer contract. A few days later he opened a Budget Rental Truck dealership at his location. U-Haul wrote a letter threatening to enforce the noncompetition language and prevent Robinson from competing, then sued Robinson for violating the covenant.
CONTRACT TO MISLEAD PEOPLE
Two lawsuits and counter lawsuits later, the trial court ruled, coming down hard on U-Haul:
“First off, the clause is void and unenforceable as a matter of law. Business and Professions Code Section 16600 … predated these events herein by many, many years. Their only reason to put a void contract clause in a contract is to mislead people … you do that so that you can cause somebody to think that that clause is, in fact, valid when it isn’t. So it is void and unenforceable as a matter of law.”
Take away point: If you are using noncompetition clauses in your contracts, make sure they are enforceable or you risk getting sued.
U-HAUL SUED FOR ITS NONCOMPETITION CLAUSE
Robinson, perhaps emboldened by the trial court ruling, sued U-Haul and presented evidence of four other lawsuits that had been filed in California by U-Haul against its former dealers attempting to enforce the (illegal) noncompetition covenant.
In the end, U-Haul’s noncompetition covenant was ruled unenforceable. U-Haul was ordered to pay $834,000 for Robinson’s attorney’s fees under what is known as the private attorney general doctrine.
A court may award attorney’s fees to a successful party who enforces an important right “affecting the public interest,” not just their own case.
The Court of Appeal found Robinson had enforced “an important right affecting the public interest, insofar as it furthered the strong California public policy in favor of free markets and against restraint of trade … a significant benefit … on the general public.”
NONCOMPETE SOMETIMES LEGAL
The most common circumstances when a noncompetition clause can be legal include: On the sale of a business or on the dissolution of a partnership or limited liability company.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee, Tahoe City and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOAs, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at email@example.com or http://www.portersimon.com.
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