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In California, non-compete clauses are generally void, subject to certain narrow exceptions.

In California, non-compete clauses are generally void, subject to certain narrow exceptions. One exception is what is known as the common law “trade secret" exception. Under this exception, a non-compete provision may be valid and enforceable if it is drafted specifically to protect the employer’s trade secrets, and the provision is narrowly tailored to achieve that purpose. Non-compete provisions in employment contracts are governed by statute, which 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."[1] Thus, in California, all non-compete clauses are therefore void,[2] with a few narrow exceptions. Such exceptions are either statutory[3] or case-law based. However, because recent cases have started to erode case law exceptions to Section 16600,[4] and because California's “settled legislative policy" promotes “open competition and employee mobility,"[5] non-compete provisions should be drafted as narrowly as necessary to withstand court scrutiny. Given the public policy behind Section 16600, which is to make “illegal those restraints which preclude one from engaging in a lawful profession, trade, or business,"[6] former employees have broad leeway in their post-employment activities. For example, a former employee may accept work from a former employer’s customers if he was first invited by the customer.[7] A former employee may inform former customers of the employee’s change in employers.[8] The former employee may also solicit non-contract employees from his former employer[9] or engage in competition with his or her former employer, in the same business, for the same customers, provided such competition is legal[10] and not “unfair," which is defined as using “confidential information obtained from the former employer to compete with that employer and to solicit the business of the former employer's customers."[11] The common law exceptions to Section 16600 include what is variously known as the “trade-secret" exception and the “non-solicitation" exception. In other words, a non-compete clause may be held valid if it is used to restrict former employees from revealing its trade secrets such as customer lists, or it is used to prevent former employees form using its trade secrets to solicit former customers.[12] Another common law exception to Section 16600 is the “non-interference" exception.[13] This exception applies to the situation where a former employee tries to recruit other employees of the former employer for new employment in competition with the former employer. To fall within these common law exceptions, however, the restriction placed by the non-compete clauses must be “reasonable," meaning that the provision will only be enforced if it “tend[s] more to promote than restrain trade and does not violate [§ 16600]."[14] The non-compete clause must be short in duration[15], narrow in geographical scope[16], and specific in the trade secrets/confidential information that it seeks to protect.[17] One court has found that restricting an employee from divulging a confidential list of preferred customers (if the customer list is not readily-available public information) for one year after termination of employment is valid.[18] A non-compete provision forbidding a “lessee from soliciting customers made known to him in confidence for a year after termination of lease" was also found to be valid.[19] While employees cannot be barred from a significant portion of a trade or industry, a “bargained-for contractual provision barring one party from courting a specific named customer" would most likely be valid.[20] Taking into consideration the above factors, I would suggest that a California non-compete provision should read: I, [Employee], for a period of 1 year after termination of my employment, will not divulge any confidential information or trade secrets to any party. I, [Employee], for a period of 1 year after termination of my employment, agree not to work for or contact [a specifically named competitor or two. These named competitors must be “bargained for" with the employee and not all competitors, nor can entire industries be named.]. Furthermore, I, [Employee], for a period of 1 year after termination of my employment, will not work for a competitor within [a specific, narrowly-defined geographic area that protects a specific interest. However, once the non-compete provision reaches international waters, it is probably unenforceable given the intricacies of international law. If an employee later choose to move to another state or country, it would be beneficial to a company for its migratory employees to re-sign updated non-compete agreements tailored to that state or country.] Footnotes [1] See California Business and Professions Code § 16600. [2] See California Linoleum & Shades Supplies, Inc. v. Schultz, 105 Cal App 471 (1930) (“Contracts in restraint of trade are not favored in law beyond the extent to which they are authorized by statute, and even then the scope is not to be extended by a construction which imports to them a meaning which cannot be found in the language of the contract.") [3] See, e.g., California Business and Professions Code §§ 16601, 16602, 16602.5. [4] Recent courts have resisted any attempt at a “narrow" interpretation of Section 16600. “Any contention that a narrow-restraint exception to California Business and Professions Code § 16600 should be adopted in California is rejected." See Edwards v. Arthur Andersen LLP, 44 Cal 4th 937 (2008). [5] See Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 946 (2008). [6] Id. at 948. [7] Id. (finding that a clause prohibiting former employee from “for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of [employer’s] Los Angeles office," restricted his ability to practice his accounting profession."); See also Morris v. Harris, 127 Cal.App.2d 476 (1954). [8] See Hilb, Rogal & Hamilton Ins. Services v. Robb, 33 Cal.App.4th 1812, 1822-23 (1995). [9] “[N]o actionable wrong is committed by a competitor who solicits his competitor's employees or who hires away one or more of his competitor's employees who are not under contract, so long as the inducement to leave is not accompanied by unlawful action." See Diodes, Inc. v. Franzen, 260 Cal.App.2d 244, 255 (1968), citing Buxbom v. Smith 23 Cal.2d 535, 547 (1944). [10] See Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 578-79 (2009); Morlife, Inc. v. Perry, 56 Cal.App.4th 1514, 1520 (1997); Morris v. Harris, 127 Cal.App.2d 476 (1954). [11] See John F. Matull & Associates, Inc. v. Cloutier, 194 Cal App 3d 1049 (1987). [12] See Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 861 (1994); Loral Corporation v. Moyes, 174 Cal App 3d 268, 276 (1985) (“§ 16600 does not invalidate an employee's agreement not to disclose his former employer's confidential customer list or other trade secrets or not to solicit those customers."). [13] See Loral Corporation, 174 Cal App 3d at 276. [14] Id. [15] Extremely broad time provisions are most likely invalid. Three year non-compete provisions have been found invalid because the time restriction did not fall within an exception to § 16600. See Hill Med. Corp. v. Wycoff, 86 Cal App 4th 895 (2001) (provision barring radiologist from practicing radiology within geographic area for three years was invalid because he was effectively excluded from his profession); Beatty Safway Scaffold, Inc. v. Skrable, 180 Cal App 2d 650 (1960) (non-compete provision where defendant agreed not to sell or lease any equipment for three years after termination was invalid). Non-compete provisions restricting an accounting employee from performing his services for previous clients for 18 months after termination was held invalid because it “restricted his ability to practice his . . . profession." See Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008). Other cases have affirmed that an 18 month restriction is too long. See Dowell v. Biosense Webster, Inc., 2009 Cal App LEXIS 1860 (2009) (striking down an 18 month post termination non-solicitation period). [16] Geographic area is also considered in California. Companies attempting to restrict former employees from the contiguous United States have not been successful because the broad provision effectively foreclosed competition. See Comedy Club, Inc. v. Improv W. Assocs., 2008 US App LEXIS 1258 (2008). Even significantly smaller geographic restrictions are usually found to be invalid. For example, a clause forbidding one doctor from practicing within 25 miles of the plaintiff was found to be invalid when the defendant had disclaimed any interest and goodwill in the plaintiff’s business. See Haas v. Hodge, 171 Cal App 2d 478 (1959). Another court struck down a 20 mile radius prohibition because the plaintiff could not show that the area was necessary to protect its trade secrets. See Hair Club for Men, LLC v. Elite Solutions Hair Alternatives, Inc., 2007 US Dist LEXIS 30167 (2007). [17] See Edwards, 44 Cal. 4th at 937. [18] See Gordon v. Landau, 49 Cal.2d 690 (1958). This holding is affirmed by numerous courts. See e.g., Gordon v. Schwartz, 147 Cal.App.2d 213 (1956); Gordon v. Wasserman, 153 Cal.App.2d 328 (1957). The Retirement Group v. Galante, 176 Cal. App. 4th 1226, 1238 (Cal. App. 4th Dist. 2009). [19] See Ingrassia v. Bailey, 172 Cal App 2d 117 (1959). [20] See General Commer. Packaging v. TPS Package Eng'g, 114 F3d 888 (1997).

See http://www.kingofalhambra.com/2011/06/in-california-non-compete-clauses-are.html.

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The article is not legal advice or opinion and should not be construed as such. Franklin Tzeng, Esq. is a practicing attorney, specializing in business development and immigration law in Alhambra. For more information, visit franklintzeng.com or facebook.com/franklintzengesq. To ask Tzeng a question, send him an email at [email protected].

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