WORKPLACE LAW - Non-Competition Agreements

Question:

Can you please tell me if there is anything I can do to limit a former employee’s activities if they quit and start working for another employer? I am worried about my employees going to work for my competitors and want to know what I can do to prevent this.

Answer:

From your question, it sounds like you are referring to a non-competition or “do not compete” agreement, which would restrict your employees from entering into direct competition against you after leaving your employment. These types of agreements are common for businesses seeking to prevent their former employees from unfairly competing with them once the employment relationship has come to an end.

However, you should be aware that the law in California is very specific when it comes to non-competition agreements. Because of this, most non-competition agreements are actually not enforceable under the law. For example, an agreement that restricts an individuals’ ability to work in a particular field will not be enforced by a court of law because it unfairly limits an employee’s ability to pursue employment to which he or she is legally entitled. In fact, the recent decision of Edwards v. Arthur Andersen LLP (2006) 142 Cal. App. 4th 603 held that such agreements will not be enforceable even if they are narrowly construed to leave a substantial portion of the available employment market open to the employee.

California courts had previously relied on an exception to the non-competition rule, which provided that a non-competition agreement did not violate the law if the restriction being imposed was limited and left at least part of the job market available to the employee. The Edwards court determined that this exception (commonly known as the “narrow restraint” rule) was actually not a proper application of California law, and that the agreement in Edwards was invalid because, even though it was limited in time and scope, it nonetheless restricted the employee’s ability to practice his profession. The Court therefore concluded that non-competition agreements are invalid and in violation of public policy even if narrowly drawn, thereby severely restricting an employer’s ability to require employees to sign such an agreement.

However, a non-competition agreement can be enforceable under California law if it clearly falls within one of the following exceptions:

  • Trade secrets protections—Employers can legally restrict an employee's ability to use confidential information or company-defined trade secrets.
  • Sale of a business—Employers can legally restrict a seller's ability to compete with the buyer in the geographic location where the seller had carried on its business.
  • Dissolution of a partnership—Employers can legally define a geographic area within which a business partner cannot conduct a similar business.
If you fall within one of the above specific categories, you may therefore be able to prepare a non-competition agreement for your employees to sign that will protect you from direct competition after the employees leave your company. Such an agreement should be carefully drafted to expressly state what behavior is prohibited and why. You should also be sure that your employee handbook clearly defines what information you consider to be “confidential” or “trade secret” information, so that your employees are informed as to what company information is protected.
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