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Understanding Non-compete Agreements in California

handshake-communication-284089-mMuch to the frustration of many business owners, non-compete clauses are unenforceable against most employees under California law. Pursuant to California Business and Professional Code section 16600, contracts that work to prevent employees from lawfully competing with an existing company cannot be enforced, with a couple of very limited exceptions. Is there any recourse for employers?

Exploring Other Options

In attempt to skirt California’s strict laws regarding non-compete agreements, some employers have been creative and resorted to other options in an attempt to prevent former employees from competing with their business. Non-Solicitation Agreements are one of those options. However, since they also limit free trade and have the effect of preventing former employees from soliciting clients or customers of the former employer, they have been called into question more than once. Ultimately, in Edwards v. Arthur Anderson, the California Supreme Court found that even a “narrow restraint” of trade, such as restrictions in non-solicitation agreements, violates the Business and Professions code. 44 Cal.4th 937 (2008). The Court further stated that imposing such a provision on former employees could even support an independent tort or wrongful termination claim against a business, making it critical for companies to ensure that non-solicitation provisions are not improperly included in their contracts.

In a more recent case, a California Court of Appeals squarely addressed this question and sided with the employee. In extending the potential for liability to subsequent employers who might wish to honor the terms of a former employer’s non-compete or non-solicitation agreement, the court in Silguero v. Creteguard, found that an employee who had entered into such an agreement with her former employer could indeed pursue a wrongful discharge claim against the subsequent employer for terminating her because of the unlawful agreement signed with the previous employer. 187 Cal.App.4th 60 (2010).

It has become clear that California businesses cannot prevent employees from using much of the knowledge and information they learn on the job through the use of non-compete agreements or similar contracts. They can, however, take steps to protect their trade secrets, a narrow exception to the rule against non-compete agreements, and ensure former employees do not use such information to compete against them. This exception, along with the California Uniform Trade Secret Act, suggests that an employer who works to protect proprietary information is able to enforce an agreement that prohibits disclosure of that information, even when it means preventing competition. The only way to get there?

Have a business attorney carefully draft a Confidentiality or Non-Disclosure agreement that specifically protects proprietary property of the business which may include customer lists, client information, price points, business goals, and specified strategies among other assets belonging to your business. While no agreement is immune from attack, such a strategy is a viable option to prevent legal challenges.

The laws surrounding non-compete and other restrictive covenants will continue to change and evolve. Examining your own contracts and as well as your hiring and firing policies and practices with an eye toward protecting your business is a must.

By | 2017-09-12T00:07:35+00:00 November 21st, 2014|Business Litigation, Labor & Employment Law|Comments Off on Understanding Non-compete Agreements in California