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Non-Compete Agreements

Noncompetition Agreements Generally Prohibited. 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.” Therefore, section 16600 invalidates provisions in employment contracts or noncompetition agreements that prohibit an employee from working for a competitor after completion of his/her employment or imposing a penalty for doing so, unless they are necessary to protect your trade secrets. Noncompetition agreements are strictly construed against you and in favor of the employee. This body of law was developed to ensure that employees would not be prevented from earning a livelihood if they chose to leave a particular job.​

Unfair Competition. Unfair competition is a generalized term for business conduct that is contrary to honest practice in industrial or commercial matters. Misappropriation of trade secrets is one form of unfair competition, but the term encompasses a broader range of misconduct about confidential business information. Ultimately, the term “unfair competition” has no fixed meaning, but depends instead on the facts of each case.

The case law suggests several limited instances in which relief can be granted against a former employee now in competition with you:

• When an employee forms a competing business before resigning his/her employment
  
• In certain circumstances relating to soliciting customers
  
• By disparaging your products or services, secretly diverting business to a competitor or soliciting only your preferred or most profitable customers.

Soliciting Customers. An employee can notify customers that he/she is severing his/her business relationship with you and engaging in business for himself/herself, even before the employee resigns.

However, an employee, during employment, owes you a duty of diligent and faithful service, and thus cannot solicit customers before leaving employment. With the exception of solicitation using a former employer’s trade secrets, an employee generally is free to solicit customers of his/her former employer after he/she resigns.

Courts Rule Against Noncompetition Agreements. The California Supreme Court has repeatedly confirmed that noncompetition agreements are unenforceable in California. Agreements that restrict an employee’s ability to pursue similar employment after leaving a job are prohibited, even if they are narrowly written and leave a substantial portion of the available employment market open to the employee. Unless a noncompetition agreement clearly falls under one of the following exceptions, it will be unenforceable in California:

• Trade secrets protections, which can legally restrict an employee’s ability to use confidential information or company-defined trade secrets
  
• Sale of a business, which can legally restrict a seller’s ability to compete with the buyer in the geographic location where the seller had carried on his/her business
  
• Dissolution of a partnership, which can legally define a geographic area within which one of the partners cannot conduct a similar business
  

California courts consistently find that noncompetition agreements go against public policy because they restrict an individual’s ability to earn a living. Requiring a former employee to obtain a release of an invalid agreement constitutes unlawful interference with the employee’s rights. In addition, a waiver of “any and all” claims is not an illegal waiver of employee indemnification rights unless the waiver specifies that indemnification is being waived.

In Dowell v. Biosense Webster, Inc.  a California court held that the trade secret protection permitted under law does not automatically exist as an exception to noncompetition agreements. The Court of Appeals held that a broadly worded noncompetition and nonsolicitation agreement did not protect trade secrets. The court also expressed doubt as to the existence of a common-law trade secret exception to noncompetition agreements. Employers who want to protect trade secrets should consult with legal counsel for assistance in drafting agreements.