Noncompete agreements are contracts between an employer and an employee that are typically signed at the start of their business relationship that prevent the employee from working for competitors during or after their period of employment. However, California is one of three states where employment non compète clauses, with some exceptions, are not legally valid. But there are exceptions.
Additionally, a ban on noncompete clauses is likely to become federal law. President Biden’s July 9, 2021, Executive Order asked the Federal Trade Commission (FTC) to limit such agreements. In response, the FTC proposed a rule on Jan. 3, 2023 to amend the Code of Federal Regulations by banning noncompete clauses.
The reasons behind both the state law and the proposed federal law are that noncompete clauses in employee contracts stifle competition and harm workers.
But a LawPLA employer’s defense attorney can ensure that your employment contracts take into account California’s exceptions contained within its noncompete statute to help protect you from employees who leave to become your competition or work for a competing business. These exceptions address intellectual property, trade secrets and solicitation. In addition, the California Business and Professions Code addresses noncompete exceptions when a company is sold or a partner or member of an LLC leaves the company.
- Business and Professions Code Exceptions
The California Business and Professions Code allows former employees to start businesses that compete with their previous employer with two exceptions:
- When a company is sold, the sellers may agree with the buyer to not carry on a similar business within a specific geographic area of the business.
- When a partner or member of an LLC leaves the company, whether the business continues or dissolves, may agree not to carry on a similar business within a specific geographic area.
Even if you have a new hire sign a contract containing a noncompete clause, California courts — along with North Dakota, Oklahoma and the District of Columbia — hold them as unenforceable apart from these exceptions.
And, if the contract states that the noncompete law of another state applies, the court still will likely base its decision on the Business and Professions Code. In general, noncompete clauses are becoming more restrictive, as evidenced by the proposed federal rule.
- Trade Secrets
A trade secrets is information made valuable because it’s not known to the public and is “subject of efforts that are reasonable under the circumstances to maintain its secrecy,” according to the state’s Uniform Trade Secrets Act.
One example is consumer lists, which are legally considered a trade secret, if efforts are made to keep them confidential. Therefore, an employment contract that prohibits an employee or former employee from disclosing confidential information will protect that information — if it’s kept confidential or efforts have been made to do so. Additionally, a former or current employee is barred by law from misappropriating trade secrets.
- Intellectual Property
If an employee is paid to create, then that creation belongs to their employer, and an employment contract should spell this out.
An employee may develop intellectual property without even knowing that they’ve done so, especially if it’s used as one piece of a larger creation. Even simple ideas and developments can constitute intellectual property.
The exception is if the employee developed the idea or invention on their own time without using company equipment, supplies, facilities or trade secret information unless:
- It relates to actual or anticipated research or development of the employer.
- It results from any work performed by the employee for the employer.
A former employee can’t cause other employees to break their contracts with the employer. However, your employees can agree to engage in competition with you at the end of their employment contract while still working for you. Additionally, if key officers or employees agree to leave your business at the same time without giving you time to hire and train their replacements, a court may find that a breach of duty.
An expert employment attorney can determine if your employment contracts are legally valid and also include clear language addressing the above exceptions to further protect your company’s interests. Consult a LawPLA attorney specializing in employment law and employer’s defense. To schedule an appointment, call one of our Los Angeles offices or schedule an appointment online.