What is a Non-Compete Clause?
A non-compete clause in a contract is one where the employee agrees, for at least a certain amount of time and within a certain geographical zone, not to engage in the same or similar trade or profession as the employer after termination or resignation. Employers like to include such clauses in employment contracts (or sometimes even in employee handbooks) in order to prevent the likelihood of competition should the employment relationship end.
Are Non-Compete Clauses Valid in California?
No. Despite the fact that a majority of employment contracts include non-compete provisions, they are void and null in the state of California. Non-compete provisions are governed by California Business and Professions Code Section 16600, which states that “[e]very contract by which anyone is trestrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” The protection under Section 16600 against any restraint on employment presents a strong public policy in California.
Like any rule, however, there are exceptions to the general notion that non-compete clauses are invalid in employment contracts. The exceptions are either based on statute or law (even though recent cases have started to limit case law exceptions to Section 16600 based on the fact that California legislature promotes open competition and employee mobility). Let’s take a closer look at some of the common exceptions, which would make an otherwise invalid non-compete clause, valid.
- Unfair Competition – even though a former employee may engage in competition with a former employer, in the same business, for the same customers, the competition must not be unfair. The term “unfair” is defined as (a) using confidential information (2) obtained from the former employer (c) to compete with that employer and (d) to solicit the business of the former employer’s customers.
- Trade-secret Exception – a non-compete clause may be held valid if it is used to restrict former employees from revealing its trade secrets or to prevent former employees from usig its trade secrets to solicit former customers. For instance, a former employee may not use the information in a former employer’s customer lists in order to solicit these customers.
- Non-Interference Exception - this exception applies to a situation where the former employee tries to recruit other employees of the former employer for new employment in competition with the former employer.
Please note, however, that to fall within any of the common-law exceptions mentioned above, the clause must be reasonable, which means that it should tend to promote more rather than restrain trade. It should also be careful so as not to violate Business and Professions Code Section 16600. Therefore, in order to be valid, the non-compete clause must be short in duration, narrow in geographical scope, and sepcific in the trade/secrets and confidential information that it seeks to protect.