After watching employees and trade secrets go to competitors, employers understandably demand new and existing employees sign non-compete agreements. Essentially, these are separate contracts or clauses within employment agreements requiring the employee to promise to not work for a competitor for a defined period after leaving the company. In most jurisdictions, non-compete agreements are permitted with various restrictions. California does not enforce them against employees, except in extremely rare circumstances.
California law says
With a broad stroke, the California Business and Professions Code states that any contract that limits citizens from engaging in a lawful profession, business or trade of any kind is void. In other words, non-compete clauses are statutorily against the law in California.
California law does provide an exception to the general prohibition of non-compete clauses — persons who are selling the goodwill of a business may agree to refrain from carrying on a similar business. Courts interpreting this exception have said that such sales transactions must clearly state the exception is applicable for it to operate.
Post-employment non-competes are invalid
Michael Maas, an employee of Crave Entertainment Group (Crave), sold his stock to Handleman Company (Handleman), during its acquisition of Crave. Maas signed two documents with Handleman ― a stock purchase agreement that contained a three-year non-compete covenant and an employment agreement which included a one-year non-compete clause. Three years later, Maas left the company. Approximately six months after his resignation, he began working for a competitor. California's Court of Appeals permitted the non-compete covenant in the stock purchase agreement under the statutory goodwill sales exception. However, the court said that the one-year non-compete clause in the employment agreement was void because it restricted Maas' pursuit of his profession.
How can a California employer protect itself?
With almost no legal options to protect its employees from leaving to a competitor, California employers have to be resourceful to protect their interests. Some of the ways in which companies can protect their interests include:
- Requiring strong confidentiality and invention assignment agreements
- Executing strong entrance and exit interviews
- Promoting company-wide programs to develop a culture of confidentiality
- Creating effective trade secret protections
While these methods do not prevent an employee from exiting to a competitor, they may help dissuade someone from doing it.
If you are a California worker facing the enforcement of a non-compete agreement, consult with a San Jose corporate attorney to determine its validity.