Jimmy John's Brings Attention to Difficult-to-Enforce Non-Competition Clause
Like many teenagers, my first on-the-books employment was pretty far down the food chain. My older sister waited tables for a few years at a fried fish restaurant and I was able to slide into the kitchen and wash dishes for minimum wage. When my sister took a job at the local sports bar, escaping the noxious fumes, I received a raise to keep me put. Economic competition even benefits teenage dishwashers.
I am reminded of my good fortune almost two decades later with the news of sandwich purveyor Jimmy John’s use of a non-competition provision that attempts to limit any of its workers, including food preparers and delivery drivers, from working at nearby restaurants which also offer sandwiches on their menu. Such a provision might be difficult to enforce in California.
In California, non-competition provisions (also known as “covenants not to compete”) are generally void as an improper restraint on competition. Such provisions may seek to limit where an employee may work in the future or who may be solicited as a potential customer after employment ends. The law treats both varieties of non-competes the same, with general disdain. Yet, in nearly half of all employment agreements you will find a provision that if upheld operates to restrain competition. It’s not challenging to speculate why that may be as the mere existence of the provision in writing may dissuade the former employee from competing as a result of either lack of legal sophistication or a very real fear of attorneys’ fees.
Additionally, not all non-compete provisions are void on their face. There are two categorical exceptions to the rule whereby a California court will enforce narrow non-competition provisions.
First, non-competition provisions arising from the sale or dissolution of a business may be found valid. People who sell the “goodwill” in a business to another may agree to refrain from competing as part of the transaction. California Business and Professions Code § 16601 and 16602.5 [covering limited liability companies]; Hill Medical Corp. v. Wycoff (2001) 86 Cal.App.4th 895. Similarly, non-competition provisions arising from the dissolution of a partnership may be enforceable. California Business & Professions Code § 16602; Howard v. Babcock (1993) 6 Cal.4th 409. The sale-of-business exception makes sense because buyers and sellers place a value on the goodwill of the business, which may no longer exist if the seller immediately opens up a new shop.
Second, courts may narrowly enforce non-competition agreements that are designed to protect an employer’s legitimate trade secrets. Muggill v. Reuben H. Donnelley Corp. (1965) 398 P.2d 147. But, courts have also stated the line between permissible protection of trade secrets and improper restraint on competition is slim.
Even if you can fit your non-competition clause into one of the exceptions, California law limits the enforceability of the clause in specific ways (including, for example, by geographic location). In short, if you want to craft a legitimate non-competition provision it has to be as narrow in scope as possible.
Turning back to the Jimmy John’s provision, unless there is legitimate proprietary information being shared with all employees, a California court would more than likely strike the provision out of any employment contract. While I am sure that there are a few tricks to making a better sandwich, Jimmy John’s may well face an uphill battle attempting to enforce the restraint.