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Healthy Rivalries: NonCompetition and Anti-Solicitation Agreements in California

February 25, 2014

Many of us have seen them: noncompetition and anti-solicitation agreements that are built into our employment contracts. They tell us that, when we leave or are fired and for maybe a year or two afterward, we can't work for a competing business. Maybe they tell us that we can't solicit our employer's clients when we leave.

Because we need the job, we try not to think too much about it when we sign. Years later, when we leave for another company, or maybe when we're fired, or maybe when we leave to start our own business, we wonder if that agreement will come back to haunt us.  Can we work somewhere else? Can we compete for business? Can we even make a living now? Are we going to get sued?

For more than 150 years, California has held that noncompetition agreements are illegal, with only a couple of exceptions. (Those exceptions include the sale of the goodwill or ownership of a business or its operating assets, as well as the dissolution of a partnership.) So far as I know, California is the only state in the union with this virtually absolute prohibition. Other states have what is called the "rule of reasonableness," meaning that, if the noncompetition agreement is reasonable in time (say, a year or two, though some have held that 5 years or more is reasonable; imagine going 1 year, let along 5 years, without being able to ply your trade!) and space (meaning limited in geographical location, say to a city or county), then it will be enforced.

Not so in California. Noncompetition agreements in California are void, unenforceable, and even illegal, regardless of whether they are "reasonable" or not. The "rule of reasonableness" has been completely rejected in California.

In other words, you are always (with the minor exceptions noted above, and possibly the "choice of law" issue discussed below) free to work wherever you want in California.

Sometimes, employers complain that their former employees will inevitably use their trade secrets when they work elsewhere. In other words, the former employee can't help but use the secret information that they learned at their previous employer in their new job.

Again, California has completely rejected the "inevitable use" argument. To keep you from working elsewhere, the employer must show that you actually have improperly used trade secrets. Claiming that you inevitably will can't prevent you from working elsewhere.

Anti-solicitation agreements are also generally illegal. You can even solicit your former employer's customers, regardless of what you signed with your former employer. This is especially important for sales people, who spend their careers building relationships and customer lists. The only restriction is that you cannot use your former employer's trade secrets in doing so. (Some cases have held that you can't use "confidential or proprietary" information either, but those terms have never been defined, and the trend is away from that.)

So what's a "trade secret?"

A trade secret is defined as having two parts: (a) it must be the subject of reasonable efforts to keep it secret, and (b) it must derive value from the fact of being secret. Examples might include computer algorithms or software code, specific pricing information, or even hiring and training practices.

Customer lists are almost never trade secrets, although they are the things that I see employers most often claim to be trade secrets. That's because they're valuable, and so they want to keep you from using them.

It's usually pretty easy to demonstrate that customer lists aren't actually trade secrets. Employers frequently post testimonials or lists of their customers on their websites, for example. If it's not a secret, it sure isn't a trade secret.

Does all of this mean you won't be sued if you go work elsewhere? Unfortunately, it doesn't mean that. Employers who are ill-informed, or even misinformed by their own attorneys unfamiliar with this law, may seek to enforce an illegal noncompetition or anti-solicitation agreement by suing you. If that happens, it's important to contact an attorney immediately. Don't wait -- the first thing they usually do is write a letter, but then they may file for a temporary restraining order (TRO) to prevent you from working in your new place. Don't bury your head in the sand.Get an attorney quickly. A well-written, well-informed letter can often get rid of the lawsuit all by itself. If it doesn't, you'll want a good attorney on your side to ensure you can keep making a living.

Sometimes, there are "choice of law" provisions in these contracts. That means that you agreed to have the law of the sovereign state of EmployerFriendlyScrewTheWorkers apply to you. This gets very complicated, it's beyond the scope of this quick blog post, and you'll need an experienced attorney to figure it out for you.

But how will you pay an attorney to help you out? If you've found a new place to work, your new employer may be required by Ca. Lab. Code §2802 to defend you against such a lawsuit. Furthermore, recent caselaw has held that it would be illegal for your new employer to fire you just because a former employer is trying to enforce an illegal noncompetition agreement or anti-solicitation agreement.

Even though these agreements are generally illegal, I still see them all the time in employment contracts. It's important to know what you can do and what you can't if you've signed one of them.

 

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