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A Different Take On Covenants Not to Compete: California

California generally prohibits covenants not to compete. This may seem unreasonable, given that most employers who want to use such covenants are simply trying to protect the company's customer list, trade secrets and other valuable information. Employers frequently are also concerned with prohibiting the ex-employee from contacting the employer's customers after the termination of the employment relationship. Although covenants not to compete are unenforceable in California, that doesn't mean that an employer can't protect its trade secrets and prevent other kinds of unfair competition by their former employees.

Several ways exist for an employer to ensure the integrity of its business, property rights and its customer base, even in California. First, in California, as in many states, all employees owe a duty of undivided loyalty to the employer. A non-compete agreement may therefore restrain a current employee from competing directly or indirectly with the business of the employer or from using inside or confidential information to damage the employer competitively within certain limits. However, restraining an employee after he or she leaves the company is the more common problem for the employer.

An extremely effective vehicle to stop the ex-employee's inevitable solicitation of the employer's customers is with a non-solicitation provision. Notwithstanding California's general prohibition, contractual agreements prohibiting solicitation of an employer's customers by a former employee may be enforceable under certain circumstances. However, this requires a determination of whether a "solicitation" has in fact occurred.

Solicitation requires more than merely informing the customers of a previous employee's change of employment. Generally, the courts will review all the facts and circumstances surrounding an alleged solicitation to determine whether the contact between the former employee and the customer has been proper, or whether the customer information is sufficiently confidential to permit the employer some level of reasonable protection. If it can be established that the contact with the former employer's customers involved the use of a confidential customer list or other confidential information moving the case closer to a case involving misappropriation of trade secrets, it is easier for the former employer to win the case against its former employee.

Further, California law precludes an ex-employee from using a former employer's trade secrets to gain a competitive advantage. California has adopted the Uniform Trade Secret Act, which prohibits a person (including a former employee) from misappropriating a trade secret belonging to another. Courts have held that a list of customers which contains information not readily known to the public can be a trade secret for purposes of this statute. Besides customer information, other trade secrets may include strategic business information, such as marketing and business plans, sources of supply or costs and pricing information, information concerning a company's business plan, computer software and databases, research and development and internally-developed techniques.

Finally, in a different context, California will enforce a covenant not to compete which accompanies the sale of a business. This exclusion from the general principle of non-enforceability has a variety of important restrictions, including: that the agreement be in writing; that it be in conjunction with the sale of the goodwill of the business or sale of all of the shares of the business; that the promisor had an interest in the business being sold; that the promisor must agree to refrain from carrying on a similar business; that the restraint be limited to the place where the business which is sold was carried on; and the duration of the non-competition agreement cannot extend beyond the period during which the buyer or successor carries on the business purchase.