Texas Non-Competes Soon Will Be Unenforceable in California

With so many companies moving their headquarters from California to Texas in the recent years, non-compete disputes involving employees and employers who have ties to both states have multiplied.  

In these types of cases, one of the first questions the courts ask is which state’s law applies to the non-compete agreements in dispute – California’s or Texas’s?  You can find an example of such a case here.  Under California law, non-compete agreements are largely unenforceable.  To the contrary, Texas law recognizes reasonable non-compete agreements and will enforce them. 

Last month, California governor signed into law Senate Bill 1241, which, effective January 1, 2017, will restrain the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract.

This new Section 925 of the California Labor Code states the following:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

The only exception to the application of Section 925 appears in subdivision (e):

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

Takeaway:  Texas employers with California employees need to recognize that an attempt to enforce Texas non-compete agreements against their employees who primarily reside and work in California may backfire after January 1, 2017, resulting in employer having to pay employees’ attorney’s fees related to the dispute.  

Additionally, for those employees who might have dual residences in both states and might regularly perform work in both states, the question of whether they “primarily reside and work” in California or Texas may become a pivotal issue to the enforceability of their Texas non-compete agreements. 

Most importantly, employers should take advantage of the exception in the statute as well as identify other legally allowed restrictions under California law that would serve to protect the company’s interests even against California employees. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.