Covenants not to compete, also known as non-compete clauses, are very common and popular additions to employment contracts. These clauses are written by the employer in order to prevent former employees from either working for or starting a similar company in a comparable field. The concept is protection from former employees taking advantage of their knowledge of their former company’s procedures to unfairly compete with them.
Covenants not to compete are meant to prevent these details from being shared with the new company:
- Marketing Strategy
- Product Information
- Trade Secrets
- Client Lists
- Manufacturing Processes
- Future Products
- Business Techniques
Sharing this information would result in unfair competition. This lawsuit would require costly litigation so many companies include this clause in the contract their employees are required to sign in order to avoid the hassle.
While many states still honor this clause in full, California has decided to deem covenants not to compete unenforceable. There are some reasons behind the decision to make them unenforceable, but there are exceptions to the rule as well.
Why Does California Ban Enforcement of Non-Compete Agreements?
There are two main reasons why California decided anti-compete covenants should no longer be enforceable. The first reason deals with the support of a free market. The policy is in favor of economic freedom and employee mobility while taking into account many antitrust considerations. Covenants not to compete in some ways help to structure large companies into monopolies simply because they prevent knowledgeable former employees from ever entering into competition with them. This also makes getting fired more detrimental for the employee, as they may be unable to use their experience to get hired at another company as they would then be found guilty of unfair competition.
The other reason involves avoiding unnecessary litigation. Forcing an employee to accept an anti-compete clause may subject the employer to a lawsuit. In addition to banning non-compete clauses, closely related non-solicitation agreements are also prevented, which restrict solicitation of employees, business opportunities, or clients.
While there are good reasons why California has decided to ban non-compete agreements, there are still reasons why non-compete agreements may be enforceable in certain situations.
Exceptions to Ban On Non-Compete Agreement Enforcement
There are exceptions in certain limited situations to where covenants not to compete may still be enforceable notwithstanding California Business and Professions Code 16600 and 166601. Some examples include if the seller of a company agrees not to compete for a specified number of years or if a partner leaves a firm and thus may not compete. Non-solicitation provisions may be enforceable too if they relate to such matters as trade secret confidentiality.
In some situations, non-solicitation provisions may be acceptable for litigation if they result in unfair competition. They are more often related to more knowledgeable parties leaving the firm, such as a partner or high ranking manager, than low level employees simply trying to find work following leaving their previous firm. In example, a low ranking sales person leaving Company A for Company B wouldn’t have the same abilities in unfairly using Company A’s trade secrets that a manager doing the same might have.
It’s important to note that nondisclosure agreements are still allowed in California. While they indeed are different, they do share some similarities with non-compete agreements.
Nondisclosure Agreements Versus Covenants Not to Compete
Nondisclosure agreements relate more specifically to the sharing of trade secrets than covenants not to compete, which deal more directly with an employee leaving the company and then working for another company or themselves as a competitor. Nondisclosure agreements are more respecting of the freedom of the employee, allowing them to leave and work for a competing enterprise, but disclosure of information related to the previous company such as trade secrets or client lists is prohibited.
There are cases where employers have attempted to masquerade covenants not to compete as nondisclosure agreements, but if the case is taken to court, the clause will usually be found invalid and thus not enforceable.
In conclusion, California’s change in law regarding covenants not to compete has allowed employees more freedom in mobility, has helped minimize unnecessary litigation, and has maintained the structure of a free enterprise system while still granting employers certain rights to protect their company from unfair competition. As mentioned previously, there are still exceptions to when a covenant not to compete may be enforceable, such as in cases of unfair competition. If you feel your rights have been violated in this regard, you may benefit from legal representation for your case. While this article is a great starting point in educating yourself about the changes to enforceability of covenants not to compete, only an attorney can give you legal advice regarding the best course of action for you to take if you feel litigation is necessary or if you might be facing litigation yourself.
Finding a Business Litigation Attorney
WB Law Group is a professional, reputable law firm with years of experience in business law in such matters as business litigation and dealing with complicated matters such as covenants not to compete and other business agreements. These matters can be difficult to manage without a legal representative and advisor by your side to guide you through the process and ensure your rights are protected. We are happy to schedule a consultation with you to review your case and advise you on what steps you should take next. Whether you need a Fresno or San Diego business litigation attorney, we can help.
For questions, or to schedule a consultation, contact us today at 559.431.4888 (Fresno) or 619.399.7700 (San Diego).