The Ninth Circuit Refuses to Enforce California’s Ban on Non-Compete Clauses in Employment Contracts

On March 27, 2002, the United States 9^th Circuit Court of Appeals restricted an employee’s right to change jobs and work for a competing company in California. The Bennett v. Medtronic decision undercuts a long-standing policy in California state courts of voiding non-compete clauses in employment contracts. The change could have a significant impact on the practice of California companies hiring employees from out-of-state competitors.

In the Bennett case, three employees worked for Medtronic, a medical device company based in Tennessee, under signed contracts with non-compete clauses. The employees left Medtronic for positions with NuVasive, a competing firm in San Diego, California. Medtronic sued the employees and NuVasive in a Tennessee court for breach of contract. On the same day, the employees filed a lawsuit in a California court seeking a declaration that non-compete clauses are void under California law.

The employees sought relief in California courts because California statutes and case law stand firmly on the precept that non-compete clauses in employment contracts are unreasonable restraints of trade. California stands in stark contrast to 44 other states that traditionally enforce employee agreements not to work for a competitor for a reasonable time after terminating the employment relationship. Employers have tried a variety of creative legal theories (e.g. the inevitable disclosure doctrine) to convince California courts to enforce non-compete clauses. Up until now, those arguments were rejected in favor of the employee’s general right to work and specific right to change jobs and work for a competitor.

This public policy has been upheld by California courts even when the employment contract was executed out of state before the employee moved to California to work for a competing company.

The Bennett decision creates a disparity between state and federal courts within California. This federal ruling completely abrogates a 1998 state appellate ruling that staunchly defended California’s policy against non-compete clauses. The federal court clearly prefers the law of other states. So California employers who want to hire key employees from out-of-state competitors must keep the non-compete issues confined to California state courts. One strategy is a preemptive lawsuit. Such cases require careful planning to keep them from being removed to federal court.

On a practical level, the Bennett decision will discourage California employers from hiring employees cuffed by non-compete agreements with out-of-state competitors. The legal and financial risks are now greater.