Restraints on Former Employees’ Competing Against Employer

An employer recruits and trains its employees at great expense and often gives those employees access to its best practices, technologies and customer list as part of their job duties.  It is always a concern for the employer when any employee jumps ship and goes to work for the competitor.  It is because of that concern that employers frequently add a noncompetition clause to their employment contracts, especially for key employees.

On the other hand, it is a matter of human dignity that employees should generally be at liberty to offer their know-how and abilities to any other employer so that such employees can grow their careers and income potential.  As the thinking goes, why should an employer be able to monopolize any given employee to the detriment of said employee?  And for that reason the various state legislatures and courts have long recognized the need to regulate the rights and obligations of employers and employees in regards the ability to compete.  In California, that regulation starts with California Business and Professions Code section 16600.  We will only discuss California law in this article and remind readers that other states’ laws can vary considerably in this field.

Section 16600 states plainly that, except for limited 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.”  The courts in California have long concluded that this means that any contract that purports to restrain an employee from competing is suspect and should be highly scrutinized.  The courts have recently gone further and held that even if the restraint in an employment contract is “reasonable” it can still be impermissible if the restraint does not fall under a recognized exception to section 16600.

The Business and Professions Code provides for certain exceptions where a noncompetition restraint is allowed.  Section 16601 states that in a sale of business transaction the seller of the business can be restrained from competing against the business sold under certain conditions.  Similarly, section 16602 allows a partnership agreement to restrain a dissociating partner from competing with the partnership so long as certain conditions are met.  Section 16602.5 mirrors 16602 in allowing members of limited liability companies to be restrained from competing with the limited liability company after leaving the company.

The courts in California, however, previously have determined that protecting the employer from having its other employees “raided” by a departing employee and protecting its trade secrets and other proprietary information can be in conflict with the right to compete embodied in section 16600.  For this reason many California employment contracts contain “non-solicitation of employee” restraints instead of (or in addition to) noncompetition restraints.   Such employment contracts frequently also contain a “non-solicitation of customers” restraint.

Because of a major California Supreme Court case in 2008, there is significant doubt about the enforceability of restraints on the solicitation of the employer’s other employees.  This is because such non-solicitation restraint can be viewed as an impermissible restraint on the other employees’ ability to find new employment if the departing employee is prevented from recruiting them.

On the other hand, the protection of trade secrets and proprietary information through a nondisclosure agreement is likely perfectly fine in an employment situation.  But employment contracts usually only insert a non-solicitation of customers provision into an employment agreement in an attempt to get around the prohibition on noncompetition restraints.  Because California courts are not clear on the enforceability of such restraints in employment contracts, such an approach is unwise.

If the restraint is simply included as part of an employment agreement and really only provides for non-solicitation of the employer’s customers, there is a high risk that it can be deemed an impermissible restraint on the employee’s right to compete.  If the restraint is instead a nondisclosure covenant that restrains the employee from using or disclosing the employer’s trade secrets, including customer list, then it becomes more likely to be enforceable.  The better approach, however, is to not include any such restraint in the employment agreement but have the employee enter into a separate, full nondisclosure or confidentiality agreement.

Thus, under current California law, it is better to not attempt to restrain an employee from competing in any way.  Instead, the employer’s focus should simply be on protecting the employer’s trade secrets through a proper nondisclosure agreement in addition to the employment agreement.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.  This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.  For more information please visit my website at www.palacioslawoffice.com.

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About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit www.PalaciosLawOffice.com to learn more.
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