Non-Compete Agreements in California
Provided by HG.org
A non-compete agreement or covenant not to compete is a legal agreement in which one person, usually an employee, agrees not to compete against the business for a certain amount of time. California has very specific rules regarding such agreements.
California is one of the few states that explicitly prohibits non-compete agreements. Most other states allow covenants not to compete even if they disfavor them by viewing them as a restrain on trade. Therefore, even if both parties willingly enter into an agreement of this nature in California, the agreement will likely be found invalid. This means that if an employer attempts to enforce the agreement against the former employee, it will usually not be enforced.
California’s laws do provide limited circumstances in which covenants not to compete are valid. One situation is when the owner of a business sells the entire business or the goodwill of the business. The seller might be bound by a non-compete provision.
Another situation in which a covenant not to compete may be valid is when a partnership or limited liability corporation that is being dissolved or disassociated. Additionally, a covenant not to compete agreement may be entered into a shareholders agreement or partnership agreement when it prohibits an employee from competing within a limited geographic area.
Even if a covenant not to compete may not be enforceable, this does not mean that the former employee can unfairly take customers. This prohibition is part of California’s rules on unfair competition. Unfair competition in this context generally means using the customer list from the former employer if it was considered a trade secret and the former employee misappropriated the customer list.
Employers may specifically state in employee documents that customer lists are a trade secret. Generally, customer lists are trade secrets when the employer has invested substantial time and effort in securing the customers. Additionally, the list must have been kept secret and not made public. A customer list may contain extra information that makes it more private, such as an analysis of the specific needs and interests of each customer on the list.
The list is considered to be misappropriated if the former employee solicited the customers rather than simply informing existing customers of a change in professional affiliation. The latter scenario is usually appropriate so that the employee can explain to the customers with whom he or she may have established a relationship that he or she is no longer connected with the company. However, going any further than this mere announcement may be considered solicitation and prohibited conduct. However, it can be difficult to determine whether an employee is making an announcement or is really trying to solicit the customers.
Solicitation of Other Workers
California’s rules on soliciting office managers and coworkers is similar to that of soliciting customers. Generally, an employee who is leaving the company can announce his or her impending departure. However, the employee is prohibited from asking other employees to leave with him or her or otherwise solicit employees. However, if other employees of their own free will decide to leave shortly after the departing employee leaves and join him or her in a new venture, this conduct is permissible so long as the continuing employees are the ones to contact the departing employee first.
Interference with Business Contracts
Another complication that can arise in the case of non-compete agreements is the possibility for a new employer to be named as a defendant if the departing employee joined a business that is competing against the former business. Companies are often hesitant to engage employees if they fear that they will face legal liability. Defending a lawsuit can be expensive even if the business eventually wins the case.
Due to the legal complications of non-compete agreements, employees and other parties who are being asked to sign such agreements may wish to consult with a business law attorney. This tactic can help them understand the particular significance of such an agreement and the likelihood of whether or not it will be enforced by the court.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.