.Noncompete Agreements Are Also Nonlegal in California

There is a right way and a wrong way to protect yourself from former employees becoming competitors.

You hire Joe to work for you. After learning everything he can, he quits and starts a similar business. He also hires several of your other employees and lures away some of your best customers. Is this legal? Is there anything you can do to prevent this from happening? Many employers think that the best way to protect themselves from this is to have all their employees sign a noncompete agreement. Such agreements are very common, but they are not generally legal in California.

Noncompete agreements typically include provisions like this: After termination of his employment, [employee] agrees, for a period of [number] years within a [number]-mile radius of [company and location], not to engage or participate in, directly or indirectly, any business which is, or as a result of such engagement or participation would become, competitive with [company]; deal, directly or indirectly, in a competitive manner with any customers doing business with [company]; or solicit any employee of [company] to become an employee of anyone other than [company].

Section 16600 of the California Business and Professions Code states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” There are some very limited exceptions to this rule involving the sale of a business or the dissolution of a partnership. The reason for this rule, which dates back to 1872, is the state’s policy of protecting its citizens’ right to pursue the employment of their choice. Even very narrow restraints on a person’s ability to freely pursue her profession have been struck down by the California courts.

Does this mean that there is nothing an employer can do to protect herself from someone like Joe? Happily, the answer is no.

There is a legal way — the protection of trade secrets — to prevent former employees from using what you taught them against you. Under California law, a trade secret is defined as information whose value is at least partly derived from being not generally known. Trade secrets can be lists of customer leads, a method for completing a certain task, a financial plan, the existence of negotiations, or software code. For something to be considered a trade secret, you must make reasonable efforts to keep it confidential. Even information that you think of as secret may not be seen that way if it is not difficult or particularly time-consuming to acquire.

An employer is within her rights under California law to take steps to prevent a former employee from using trade secrets to compete with her. But employers should take the following steps:

Identify all the information that you would not want your competitors to have. Take steps to keep it confidential — keep it password protected, keep it under lock and key, stamp it “confidential.” Add a section to your employee handbook explaining your policy for keeping certain information confidential. Have all employees sign a confidentiality agreement upon starting their employment. Make sure all employees understand and acknowledge in writing what is confidential.

Is your list of customers a trade secret? That depends. Do you boast about it on your web site? If so, it obviously isn’t a secret, and if an employee quits and solicits all your customers, there would be no violation of trade secret law. On the other hand, if your customer list is kept confidential, was developed by lengthy and expensive efforts, and contains nonpublic information, it may be a trade secret. However, some courts have held that a former employee can send an announcement to customers he worked with to let them know he switched jobs — this is called the “professional announcement” exception. The former employee will not be found to have violated trade secret law as long as the customers make their own decision to switch without being affirmatively solicited.

What about solicitation of your current employees by a former employee? Employers may prohibit former employees from using confidential information such as salaries and performance reviews to solicit employees. In fact, even general prohibitions on solicitation of former co-workers for a limited period of time have been upheld by the courts. For example, the following provision was upheld: “[former employee] shall not disrupt, damage, impair, or interfere with his former employer by raiding its work-staff for the one-year period following termination.” However, an agreement that prohibits a former employee from hiring former co-workers who apply of their own volition would not be enforceable.

Even if you do everything you can to protect your secrets, you still cannot, under state law, prevent a former employee from competing against you and soliciting your employees and customers, as long as they don’t use your trade secrets to do so. Some employers try to use confidentiality agreements to accomplish what they wish they could accomplish with a noncompete agreement. Courts generally see through these attempts. For example, in a recent case, an employer argued that former employees violated trade secret law by soliciting customers on the employer’s confidential customer list. The court disagreed because “the names of … existing customers were readily available … from independent third party sources.”

This is yet another reason why so many business owners throw up their hands in disgust and say, “Ugh! California law is always such a hassle to deal with!” But the idea behind the prohibition on noncompete agreements is actually pretty smart. Employers can hire the best people they can find without having to worry that they are violating a noncompete agreement. And, besides, isn’t complicated, onerous law a small price to pay for living in such wonderful place?


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