Employee Non Compete Agreements in California: They’re Not Enforceable
By Robert A. Bleicher, Carr McClellan P.C.
In many United States jurisdictions, covenants that restrict a departed employee’s ability to compete with his former employer are enforceable with reasonable limitations. Typically, courts permit a restrictive employment covenant after applying a balancing test that weighs geographic regions, time limits, or other considerations to prevent the restriction from being overly oppressive. Not so in California, where those considerations are effectively irrelevant. Home to the world’s seventh largest economy, it has the most aggressively enforced public policy against contracts that in any way prevent a person from engaging in his or her profession, trade, or business.
California’s Business and Professions Code section 16600 expresses the state’s strong pro-employee mobility policy. It states: “Every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” Under the California Supreme Court decision in Edwards v. Arthur Anderson, even partial restraints on an employee’s ability to engage in his or her profession are invalid. In fact, not only are those clauses invalid, but including such provisions in an employment contract is an unfair business practice that violates California’s unfair competition law, thus subjecting the employer to additional liability. Subject to a narrow exception involving the sale of a business, its goodwill, or the dissolution of a partnership, California’s bar against restrictive employment covenants applies to any employment in California, which includes (1) employees living in California, (2) employees hired by California employers but who work out of state, and (3) out of state employees who perform services in California.
Following Edwards, restrictions that generally attempt to prohibit an employee from soliciting customers or rendering services to the former employer’s customers have been held to run afoul of Section 16600. For example, in Golden v. California Emergency Physicians Medical Group the Ninth Circuit recently held that “no re-hire” clauses commonly found in severance and settlement agreement are invalid. These clauses typically stipulate that the employee agrees not to work for the employer in the future. The clause at issue in Golden stated that, in return for settling his discrimination claim, the plaintiff would not seek employment with any facility currently owned by the employer or with any facility the employer might own or contract with in the future. The Court of Appeals concluded that this restriction violated section 16600 and that the statute applies to any agreement that causes “a restraint of substantial character” on the employee’s ability to work.
Contractual provisions that seek to protect a company’s trade secrets—the so-called “trade secret” exception—may still have some vitality in California. Applying this implied exception to Section 16600, some federal district courts in California—applying California state law—have enforced non-solicitation clauses in employment agreements where the clause was deemed necessary to protect the company’s trade secrets. Significantly, however, post-Edwards several California state courts have refused to enforce such covenants and have observed that the so-called “trade secret exception” is of doubtful validity. Notwithstanding this ambiguity, California’s Uniform Trade Secrets Act still bars an employee from using his former employer’s trade secrets after he leaves the company.
Given California’s hostility to covenants that restrict employee mobility, it is very important to carefully examine and draft any clauses that could be seen as running afoul of Section 16600. Plainly, broad provisions that seek to prevent an employee from working for a competitor or contacting clients should be revised or stricken when dealing with California employees. Further, when attempting to protect a company’s trade secrets by contract — through a clause that bars the solicitation of employees or customers by the use of trade secrets — the trade secrets should be identified as clearly as possible in the form of customer lists, vendor lists, product information, strategic plans, and financial information. For some higher level employees, the “garden leave” option may be an alternative. It should be noted that no California court has yet ruled on the enforceability of “garden leave” clauses under Section 16600. Arguably, they are valid because they compensate a former employee for a period of time as long as they are not employed in the particular field, rather than a bald restraint on the employee’s profession. Nonetheless, given the mandate of Section 16600 and its broad interpretation by California’s courts, it would not be surprising if “garden leave” clauses were found to be an unenforceable restraint.
California courts vigorously enforce the prohibitions of Section 16600 and carefully scrutinize both the express and implied consequences of language that in any way seeks to limit the free mobility of California employees. Accordingly, companies with employees or operations in California can mitigate their risk by ensuring that their employment agreements adhere to California’s pro-mobility policies.
Publilshed: January 2016 l Photo: Michael Kvakin - Fotolia.com