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UVMFLOWNET  May 2003

UVMFLOWNET May 2003

Subject:

Re: Contracts

From:

"Jeff Field, RVT" <[log in to unmask]>

Reply-To:

UVM Flownet <[log in to unmask]>

Date:

Thu, 8 May 2003 00:42:21 +0000

Content-Type:

text/plain

Parts/Attachments:

Parts/Attachments

text/plain (128 lines)

Don,
It is my understanding, from reading some of the legal forums out there, that
most states would invalidate non compete agreements that completely prohibit an
employee from practicing a trade or profession. I assume that your example is
from your home state. If so California has "rule 16600" that  actually
prohibits non compete agreements with a few narrow exeptions. If the agreement
that your person is being held to is as described, it sounds like he/she is
being held to an unenforcable agreement. Here is an excerpt from an article
that I found on the subject. Also, check this URL
http://www.buchalter.com/FSL5CS/alerts/alerts229.asp
 that contains a cite and description from a case that cost Aetna/US Healthcare
a great deal of money for terminating an employee who refused to sign a
contract that contained an illegal non compete clause. Lastly, I would echo
Bonnie's comment...why on earth would anyone agree to such onerous terms,
especially with qualified ultrasound techs in such short supply?
Jeff

Although Millennium’s particular stage of business and concerns might differ
from that of other businesses, the problem presented is not unique.  In most
other states, a rule of reason is applied such that the enforceability of non-
competition provisions in an employment contract is dependent upon whether the
protection sought is reasonable to safeguard legitimate rights of the
employer.  This is not the case in California.

The California legislature early on rejected the common law rule, which
authorizes reasonable restraints of trade.3  Under Business & Professions Code,
166004, “every contract by which anyone is restrained from engaging in a lawful
profession, trade, or business of any kind is to that extent void.”
Accordingly, the general rule in California, as opposed to most other American
jurisdictions, is that non-competition clauses and other employment terms that
purport to restrain.an employee’s right to change employment are, per se,
illegal and unenforceable.5  Fortunately, economic realities have compelled the
creation of both statutory and judicial exceptions.

Pertinent Exceptions To The General Rule

Although certain statutory exceptions exist6, the exceptions applicable to the
situation confronted by Millennium and similar businesses are judicially
created.  There are two closely related judicial exceptions.

1. The Limited Application Exception.

It has long been the rule that 16600 applies only when an agreement prevents
the pursuit of an entire business or profession.7  As the Court stated in
Campbell v. Board of Trustees of Leland Stanford Junior University (9th Cir.
1987) 817 F.2d 499:

Even though the California legislature rejected the common law rule
that “reasonable” restraints of trade are generally enforceable, it did not
make all restrictions unenforceable....  “[W]hile the cases are uniform in
refusing to enforce a contract wherein one is restrained from pursuing an
entire business or profession..., where one is barred from pursuing only a
small or limited part of the business, trade or profession, the contract has
been upheld as valid.”(817 F.2d at 502, quoting Boughton v. Socony Mobil Oil
Co. (1964) 231 Cal.App.2d 188, 192.)

This rule has been applied in a variety of commercial situations.  For example,
in King v. Gerold (1952) 109 Cal.App.2d 316, the Court upheld a covenant
prohibiting one party from manufacturing a certain model of trailer.  King, a
trailer designer, had granted Gerold, a trailer manufacturer, a license to
produce a particular trailer model.  The parties agreed that if the license was
not renewed on its expiration date, the licensed manufacturer, Gerold, would
cease to produce the trailer for any purpose.

King sued to enjoin Gerold from continuing to manufacture the trailer,
following expiration of the license.  Gerold challenged the restriction under
16600, claiming it was a void restraint of trade.  Both the trial court and the
Court of Appeal rejected this assertion, ruling that since Gerold was “not
thereby prohibited from carrying on his lawful business of manufacturing
trailers but [was] barred merely from manufacturing and selling trailers of the
particular design and style invented by [King],” the contractual restriction
was not void.  (109 Cal.App.2d at 318.)

This principle was reiterated in Boughton v. Socony Mobil Oil Co., supra, 231
Cal.App.2d 188, which involved a provision in a grant deed prohibiting certain
real property from being used as a service station prior to a date more than 20
years from the date of the deed.  The plaintiff owners of the property asserted
the deed restriction to be invalid under 16600.  The Court rejected the
challenge, holding that the deed restriction did not prevent plaintiffs from
conducting any profession, trade or business; the restriction only operated as
a restriction in a single location.  (231 Cal.App.2d at 190-191.)

Likewise, in General Commercial Packaging, Inc. v. TPS Package Engineering,
Inc. (9th Cir. 1997) 126 F.3d 1131, 1132-1134, the Court refused to nullify a
restriction prohibiting a packaging subcontractor from dealing directly with a
specific, named customer or other companies introduced to subcontractor by
plaintiff.  The Court held the provision to be valid, since it did
not “entirely preclude” the subcontractor from conducting its business.

By contrast, in Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284 the
Court invalidated a non-competition clause that purported to bar a physician
specializing in “hair restoration services” from engaging in that business in
six Southern California counties and San Francisco, for three years following
termination of subject agreement.  In Bosley Medical Group, the Court found the
covenant to be illegal and unenforceable, because the restriction sought to
effectively prohibit the physician from practicing his entire business or
profession.

Hence, the key to invoking this exception to the prohibition embodied within
Business & Professions Code, 16600 is to assure that the non-competition
provision is drafted as narrowly as possible.  While it would almost never be
permissible for a former employee to be restricted from accepting employment
with a competitor, restrictions on the former employee’s scope of activities
for, or knowledge imparted to, a competing business are generally upheld,
especially where the limited restrictions rationally relate to the preservation
of a demonstrable competitive advantage held by the former employer.

> We've had a local mobile company hire techs with a contract stating
> they must stay for X years, and if they leave they must not work for a
> clinical site in the county for X years. Has anyone had experience with
> this kind of employment contract? Are they legal? Legitimate? How long
> should a tech be indentured?
>
> I can understand the company's impulse to protect itself, but this
> seems kind of draconian.
>
> Thanks for any input.
>
> Don Ridgway
> Grossmont College
> Grossmont Hospital
>
> To unsubscribe or search other topics on UVM Flownet link to:
> http://list.uvm.edu/archives/uvmflownet.html

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