August 27, 2020

In California, non-compete agreements between employers and employees are generally unenforceable. California Business and Professions Code section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” A non-compete agreement is a restrictive covenant which forbids an employee from working for a competitor, generally for a specific length of time.

Problems with Non-Compete Agreements
The use of non-compete agreements is controversial, to say the least, because of the restrictions placed on the employee. Generally, an employer is unable to enforce a non-compete clause, even if signed by the employee, without proving that the employee’s breach caused actual damages to the employer’s business. The employer would need to prove to the court that the non-compete agreement protected a legitimate business interest, but even then, courts are wary of limiting an employee’s right to earn a living.

California’s Treatment of Non-Compete Agreements
Generally, non-compete agreements are not enforceable in California, and if an employee refuses to sign a non-compete agreement, the employer may not terminate the employee. Some employers have attempted to sidestep the law by having “non-solicitation” agreements prohibiting former employees from soliciting the company’s current employees. However, recent California cases have found even these more narrow provisions unenforceable. [See AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923.]

Non-compete and non-solicitation agreements are governed by Business and Professions Code section 16600, as mentioned above. California allows non-compete agreements only in three limited circumstances: when there is 1) a sale of goodwill or interest in a business (section 16601), 2) dissolution of a partnership (section 16602), and 3) dissolution or sale of a limited liability company (section 16602.5). [Dowell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564, 574.] Other than these three narrow exceptions, California does not allow non-compete agreements.

Out of State Non-Compete Agreements
If an agreement is made in another state, or includes a choice-of-law provision requiring that the non-compete agreement be governed by the laws of another state, another problem may arise. However, California will not enforce choice-of-law provisions where it violates California’s public policy. A California employer thus cannot get around California’s general prohibition against non-compete agreements by requiring its employees to sign employment contracts governed by the laws of a state which does allow for such agreements. [Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 902.]

Trade Secrets
The only protection California employers have against employees who leave and then try to take their former employers’ customers is found in the California Uniform Trade Secrets Act. [Civ. Code § 3426 et seq.]

Under the Uniform Trade Secrets Act, California courts will provide injunctive relief against misappropriation of trade secrets when convinced that: (1) There is an actual trade secret involved; and (2) Misappropriation of the trade secret is occurring or is clearly threatened. [Civ. Code § 3426.2]

A trade secret is information, including a formula, pattern, compilation, program, device, method, technique or process, that: “(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” [Civ. Code § 3426.1(d).] Therefore, in order to be a trade secret, the information must not be generally known and the employer must be treating it like a secret.

How do you treat information like a secret sufficient to satisfy the Uniform Trade Secrets Act? Although it depends on the circumstances, there are numerous things you can do, such as:

▸ Disclose the secret only to people who have a true need to know.

▸ If the secret is embodied in a document, stamp the document with a trade secrets legend; for example, “This is a trade secret of XYZ Corporation. Disclosure of the information contained herein is strictly prohibited.” If the secret information is on a computer, put the trade secrets legend at the beginning and end of the document, or better yet, on every page of the document.

▸ Have employees sign a non-disclosure agreement.

▸ If you have to disclose your trade secrets to parties such as suppliers, have the parties sign non-disclosure agreements.

▸ Use passwords to prevent access to information stored on computers.

▸ Restrict access to your facility. Make visitors sign in and out, and require them to be accompanied while on the premises.

Need more information?
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This article is based on the law as of the date posted at the top of the article. This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.