Aug 20 2014

Non-Competition Agreements in California are Virtually Non-Existent

If you own a California business and want to prevent your employees from competing against you or soliciting your customers after they leave your employ, you will find that your options are extremely limited. Any “non-competition agreement” that you may be considering or which you had your employees sign, separately or as part of an employment agreement, will almost certainly do you absolutely no good and will not be enforced, except under very limited circumstances not usually present between an employer and employee.

Prohibited by Statute

Non-competes, as they are sometimes called, are specifically prohibited by Section 16600 of the California Business and Professions Code which provides that, with limited and specified exceptions, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Courts do not hesitate to dismiss claims which attempt to enforce non-competes, concluding that Section 16600 is a clear “expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.”  Hill Medical Corp. v. Wycoff (2001) 86 Cal. App. 4th 895, 900, 901. This public policy is so strong that courts will generally not uphold non-competes in California even when the parties have specified in their contract that the laws of another state which allows non-competes should be applied.

Even “Non-Solicitation” Agreements May Not Be Upheld

Some California decisions have treated “non-solicitation” agreements, which are designed to keep former employees from directly or indirectly soliciting clients and customers of their former employer, as though they are non-competition covenants prohibited by Section 16600. In The Retirement Group v. Galante (2009) 176 Cal. App. 4th 1226, 1238, the court stated:

We distill from the foregoing cases that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business.

Exceptions: Sale or Dissolution of Business

Two specific exceptions to the essentially iron-clad unenforceability of non-competes involve the sale of a business and the dissolution or disassociation of members or partners of an LLC or partnership. Section 16601 provides that a business owner who is selling the assets, goodwill and ownership interests of his business “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold… has been carried on, so long as the buyer…carries on a like business therein.”

This exception, however, does not give the buyer of a business carte blanche to craft an overly broad or burdensome restriction on the seller’s future endeavors: “an agreement must be narrowly tailored to the extent it is reasonable and necessary in terms of time, activity and territory to protect the buyer’s interest.”  Monogram Indus., Inc. v. Sar Indus., Inc. (1976) 64 Cal App. 3d 692, 698. Similarly, Sections 16602 and 16602.5 allow for such agreements when partnerships or LLC’s dissolve or when partners or members disassociate from the entity so long as the business will carry on.

The Trade Secret Exception

Although non-competes and non-solicitation agreements may be unenforceable in California, business owners may still be able to protect confidential or proprietary trade secrets from being used or disclosed by a former employee in certain situations. Employees are not permitted to use such trade secrets to unfairly compete with their former employer or to solicit the former employer’s customers. But a critical issue becomes the determination of what actually constitutes a trade secret. An employer who wishes to protect trade secrets must take affirmative action to ensure that the matters for protection are actually “secret.”

For example, customer lists can be trade secrets subject to protection. However, in order to qualify as a trade secret, the customer list requires 1) information 2) that is valuable because it is unknown to others, and 3) which the owner has attempted to keep secret. Civil Code section 3426; ABBA Rubber Co. v. Seaquist (1991) 235 Cal.App.3d 1, 18. The cases regarding trade secrets in the employment context reflect the competing policies in the law: the right of a business to be protected against unfair competition stemming from the usurpation of its trade secret and the right of an individual to the unhampered pursuit of the livelihood for which he is best suited. Futurecraft Corp. v. Clary Corp. (1962) 205 Cal.App.2d 279, 285-286.

Trade secret protection is available only when the information has value by affording the employer a competitive advantage over competitors who do not know of it, and when the granting of such protection will not unduly hamstring the former employee in the practice of his occupation. Id. at 288. Therefore, trade secrets must be the particular secrets of the employer as distinguished from the general secrets of the trade. In addition, the employer must have engaged in efforts that are reasonable under the circumstances to maintain its secrecy. Civil Code section 3426.1(d). Moreover, if the information is not known to be secret or confidential, it will not be protected as such. For example, if an employer does not in any manner inform or indicate to employees that particular information is secret or to be treated in confidence, a warning that nonspecific information is secret after an employee terminates his employment is, in effect, ex post facto, and not effective. See Architectural Models, Inc. v. Neklason (N.D. Cal. 1967) 264 F.Supp 312, 321, affirmed at (9th Cir. 1968) 397 F.2d 405.

The Cohen Law Firm in Westlake Village serves the unique needs of business owners. From formation to restructuring, and in an ever-changing legal, regulatory and economic landscape, businesses must constantly evolve to survive. To talk about your business’s goals and challenges or to make an appointment, please call the Cohen Law Firm today at (805) 267-7147 or send an e-mail to Randall Cohen at racohen@racohenlawfirm.com.

This article has been prepared by Cohen Law Firm for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

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