Non-Compete and Non-Solicitation Agreements – What is Legal in California?

In California, it is well-settled policy that once you leave a job, you are free to pursue any and all other (legal) employment options. For example, if you worked as a manager of a phone repair shop, you are permitted to quit that job and open your own phone repair shop right next store, or go to work for a competing shop across town—regardless of the consequences to your former employer. This is the essence of California’s position on non-compete clauses in employment contracts. Any employment agreement, offer letter, or other contract which attempts to restrain an individual from “engaging in a lawful profession, trade, or business of any kind” is void. End of story. Or is it?

As is so common in law, there are some exceptions to California’s non-compete rule. The first notable exception is that an employer can (and should) contractually restrict its employees’ use of its trade secrets both during and after employment. California, along with the Federal Government, has a deep regard for the sanctity of the trade secret. To paraphrase the Uniform Trade Secrets Act (“USTA”), a “trade secret” is any information or process which is valuable because it is not known to others. Using the phone repair shop example, the manager of the shop could certainly be prevented from utilizing the ‘secret repair techniques’ in her new shop which were invented by and brought value to her former employer. While this restriction may indirectly prevent her from opening up the competing repair shop, thus restricting her “engagement in a lawful profession,” the sanctity of the trade secret nonetheless prevails.

But suppose there were no trade secrets involved with the phone repair shop, and the former manager did, in fact, open a competing repair shop right next door to her former employer. The new shop owner may be contractually prohibited from soliciting the old shop’s customers and remaining employees by way of a non-solicitation agreement.

With regard to customers, a ‘customer list’ may itself be considered a trade secret, and for good reason. A compilation of the contact information of potential or willing customers does not create itself. It can take months or years of concentrated effort to amass a list of current and potential customers (remember the coveted ‘leads’ at the center of the classic film Glengarry Glen Ross?), and as such they may have immense value if kept secret. However, if a customer of the original phone repair shop sees the new shop opened next door and walks in, the new shop would not be violating anything if it serviced that customer. To prevent that transaction would be an unlawful restriction on trade. Any non-solicitation agreement is void to the extent that it which seeks to prevent the public from exercising its right to choose who it wants to do business with.

With regard to soliciting employees, it is common for non-solicitation agreements to prohibit an outgoing employee from “interfering with the Company’s relationship with, or attempting to entice away from the Company an employee of the Company.” In other words, when the phone repair shop manager left to open up her own shop, she could be contractually prohibited offering jobs to her former colleagues in order to staff-up her new shop. California courts have declared these prohibitions legal on the grounds that they “consider the interests of an employer maintaining a stable work force and remaining in business,” despite the restraint on business activities. This type of non-solicitation agreement, however, must pass muster as “reasonable” in both scope and timeframe.

In summary, while California courts have clearly rejected the legality of non-compete agreements, the same cannot be said for non-solicitation agreements. This is a particularly fluid and dynamic area of law with many different policy interests competing against one another. On the one hand, California despises restraints on its citizen’s efforts to conduct lawful business; on the other hand, California is fiercely protective of trade secrets (which is not surprising, considering California’s status as the world’s most innovative region) and desires to protect employers from unfair actions by outgoing employees.

Considering the tangled, thorny issues inherent in employment agreements, it is wise to consult an attorney to prepare documents tailored to the realities of your business. As with all employment law issues, an ounce of prevention is worth a pound of cure. The experts at Shenon Law Group are here to help you anticipate issues, mitigate problems, and protect your business in the long-term. Contact us today to schedule a consultation.