California Ban on 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 trade secrets, product details, marketing plans, manufacturing processes, clientele identities, business techniques, and upcoming products. This would result in unfair competition.
On the other hand, 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.
This is exactly what was at issue in the California Supreme Court case that abolished covenants not to compete except in narrow circumstances. California only allows covenants not to compete when the seller of an entire business agrees not to compete for a specified number of years. Another exception is that when a partner departs from a firm. Such covenants are only fair, since we are not talking about powerless employees in search of a job, but the movers and shakers of industry, presumably sophisticated enough to know what they are getting into.
Most states allow covenants not to compete as long as they are limited in geographic scope and limited in time after employment termination. However, California does not allow covenants not to compete – only nondisclosure, nonsolicitation, and other limited confidentiality agreements. In nonsolicitation clauses, the employee agrees not to try to convince other employees to leave the company.
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 cloak a covenant not to compete in a nondisclosure clause, as they can be held liable for a violation of public policy.
Consult a Lawyer - Present Your Case Now!
Last Modified: 05-06-2011 01:14 PM PDT
