Restrictive Covenants, Non-Compete Agreements, and California Law
October 6, 2014
In most cases, California law does not permit employers to enforce a restrictive covenant against their former employees, particularly when it takes the form of a non-compete agreement. Judges in most states view these agreements with suspicion, but California courts, following California statutory law, rarely enforce them.
In this context, a restrictive covenant is an agreement between an employer and employee that limits an employee’s ability to compete after leaving the employer. The most common and restrictive type of agreement is a non-compete agreement. That agreement prohibits the employee from offering its services within the agreement’s geographic scope for a period of time after leaving the employer. Other types of restrictive covenants may limit an employee’s ability to solicit the employer’s customer or employees for a period of time.
These agreements have two primary purposes: The first purpose is to protect an employer that must share trade secrets or sensitive financial or customer information with their employees. If an employee can easily leave to start its own firm or join a competitor, the employee could utilize the secrets to harm the employer. Trade secret protection may be insufficient because of proof difficulties and the simple fact that former employees can’t just forget what they know. The second rationale focuses on the training that an employer provides to the employee. The restrictive covenant protects an employer that spends time and resources training an employee, only to see that employee leave for a competitor.
Courts in states outside of California often enforce these agreements, but will usually construe them narrowly, apply a reasonableness requirement, or simply rewrite them so they are, in the court’s view, reasonable. California, by contrast, takes a hard stand against them and will not enforce most forms of restrictive covenants.
The California Supreme Court explained in Edwards v. Arthur Anderson LLP that “judges assessing the validity of restrictive covenants should determine only whether the covenant restraints a party’s ability to compete and, if so, whether one of the statutory exceptions to Section 16600 applies.” The statutory exceptions primarily involve business sales involving corporate stock or goodwill, or the dissolution of a partnership.
California courts will, however, enforce certain narrowly defined non-solicitation clauses. These are agreements that prohibit a former employee from “soliciting” a former employer’s customers. Any enforcement, however, usually depends upon the non-solicitation agreement’s necessity to protect the company’s trade secrets. Employee lists can, of course, in some instances be trade secrets themselves. Similarly, California courts might, in some circumstances, enforce an agreement prohibiting former employees from raiding the company’s employees if there are legitimate trade secret or other business interests at stake. The law with regard to both of these types of agreements, however, is not clear, so you should seek attorney review.
A California employer can, of course, require an employee not to use or disclose the company’s trade secrets during or after the employment term. Such agreements can help to clarify what is, in fact, a trade secret, which can be useful if litigation later ensues. The agreement should define the trade secret with some specificity, but without disclosing the secret itself.
Restrictive covenants are restraints of trade that California, in particular, strongly disfavors. This doesn’t mean that all such agreements are unenforceable. But it does mean that you should consult an attorney if you are involved with a restrictive covenant. The attorneys at Bona Law PC can answer any questions you might have about these agreements. Please call us at +1 858-964-4589.
Bona Law PC is a boutique law firm located in the San Diego, California area that specializes in business litigation, antitrust and competition, real-estate litigation, appeals, and challenges to government conduct.