California Ban on Covenants Not To Compete

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What Are Covenants Not to Compete?

Covenants not to compete, or non-compete clauses, are popular and traditional components of an employment contract. These clauses, written by the employer, prevent former employees from working for a similar company in a similar field. The fear is that former employees might share confidential information with a competing company, such as:

Sharing this information would result in unfair competition. Thus, to avoid the potential for future, costly litigation, many employers require their employees to sign these agreements.

What's the Rational behind California's Ban on Anti-Compete Covenants?

1) Free Market: There is a public policy in favor of employee mobility, economic freedom, and antitrust considerations. If the covenant not to compete clause is so geographically restrictive, for example, that a former Maryland employee cannot work in California, then the Maryland employer may monopolize the industry, because none of its former workers, who may be highly skilled in their area of expertise, will be able to offer their services to competing companies.

2) Unnecessary Litigation: Forcing an employee to accept an anti-compete clause may subject an employer to a lawsuit. Moreover, the California’s ban on anti-compete clauses also covers closely related "non-solicitation" clauses, which restrict solicitation of employees, clients, or business opportunities, which are usually void.

Exceptions to California’s Ban

California still allows covenants not to compete, but only in limited circumstances. The primary exception to the ban is where the seller of an entire business agrees not to compete for a specified number of years, or when a partner departs from a firm. As for the non-solicitation provisions being void, there is a possible exception for trade secret protection.

Further, the non-solicitation clause may be enforced in cases of unfair competition. Anti-compete and non-solicitation covenants may be deemed fair when they involve sophisticated parties that possess business knowledge and expertise in the related areas of practice. Presumably, such parties start off on a level playing field, know what they are getting into, and have enough bargaining power to negotiate.

Most states allow covenants not to compete as long as they are limited in geographic scope and limited in time after employment termination. California is unique in that it does not allow covenants not to compete; however, it does allow non-disclosure, and other limited confidentiality agreements.

How Are Nondisclosure Agreements Different?

Nondisclosure clauses allow employees to get a job, but prevent employees from disclosing confidential business information. These clauses have the desired effects of covenants not to compete, while respecting employee freedom. However, businesses must be careful not to attempt to veil a covenant not to compete in a nondisclosure clause, as a court will see through that an render the clause void.

How Can a Lawyer Help?

An attorney may be vital in navigating California’s ban on anti-compete and non-solicitation clauses. Employment lawyers may review employment contracts for the presence of anti-compete and non-solicitation clauses and suggest ways to fit them into related exceptions. Further, an attorney may suggest alternatives to anti-competes and non-disclosures to make sure that your confidential information and intellectual property are well-protected from unauthorized use.

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Last Modified: 09-12-2014 09:28 AM PDT

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