Non-compete agreements (NCAs) are an increasingly popular tool of employers in today’s global and competitive economy. As a general rule, California law does not allow for enforcement of NCAs against an employee after he or she leaves the company. This anti-NCA stance is, in fact, so well known that one technology company (Veeva) has sued its rivals, asking the court to declare that the NCAs they make employees sign violate California law. The Recorder report that the rival companies claim that Veeva is merely after their intellectual property. Regardless of the politics behind the lawsuit, it is almost inevitable that the non-compete agreements will be deemed unenforceable against California employees.
Despite the broad prohibition against NCAs in California, there are other tools available to employers looking to protect intellectual property. There are also several important applications of NCA law which employers are wise to understand.
(1) Courts are wise to crafty wording, tricks, and other work-arounds
Many employers believe they can get around the rule prohibiting NCAs. California courts have almost always seen through these creative tactics, and uniformly refused to enforce them against employees. The Huffington Post reports on just some of the many arguments which have not persuaded California courts:
- The company is headquartered in a state which does recognize non-compete agreements, not California.
- The non-compete agreement had a “choice of law” provision to interpret the agreement under the law of a state which does recognize NCAs.
- The NCA was a separate contract entered into after employment, and the employee was given separate compensation in exchange for the promise not to compete.
- The employee was required to give advanced notice of leave (typically ninety to one hundred eighty days), and received full pay and benefits during this time.
Ultimately, the lesson is that anything even resembling a non-compete agreement will not be enforced against a former employee in California in a manner which restricts his or her ability to engage in future employment.
(2) Non-compete agreements are only unenforceable against former employees, not current employees
In spite of the anti-restriction stance of California law, it does allow employers to prevent current employees from moonlighting. This allows an employer to reduce the risk of corporate espionage or other conflicts of interest amongst its employee ranks.
(3) There are a few important exceptions to the rule
Changes in ownership can result in impaired goodwill of a business. To protect against this contingency, California law allows the enforcement of non-compete agreements against the person who sells a business, or owners who sell their interests and leave business operations intact. The rule also applies any time a partner leaves a business. Yet California courts are, again, wise to potential for abuse of this rule, and refuse to enforce NCAs against employees who were merely granted nominal shares to create an ownership interest in the business.
While non-compete agreements are banned under California, employers do have other options for protecting their trade secrets and intellectual property. Consult with an experienced employment law attorney to protect your company’s financial interests.
Contact the employment attorneys at Nassiri Law Group, practicing in Orange County, Riverside and Los Angeles. Call 949.375.4734.
Understanding California’s Ban on Non-Compete Agreements, February 23, 2017 by Nina B. Ries, the Huffington Post
More Blog Entries:
Non-Compete Clauses in California Employment Cases, July 9, 2017, Employment Lawyer Blog