September 26, 2023
Do you want to protect your business from competition from previous employees or business partners? You may be tempted to include a non-compete and non-solicitation clause in your agreements or have a separate agreement providing the same protection. Here are the 5 things you need to know about non-compete and non-solicitation agreements in California.
A non-compete clause is meant to prevent an employee from working in or opening their own business in the same field as their employer for a certain amount of time post-employment. A non-solicitation clause is meant to prevent a former employee of a company from trying to solicit the company’s employees, vendors, or customers to instead work for or conduct business with the employee’s new company. Either type of agreement can take the form of a separate contract or be included as a clause within an agreement.
California Business and Professions Code section 16600 does not permit non-compete agreements to be enforceable except to the extent that the agreement protects an employer’s trade secrets. California considers such agreements or clauses limiting to a former employee’s ability to work in the same industry and void and illegal because they impinge on a worker’s ability to freely engage in gainful employment of their choosing.
For example, an employee of a tech company is able to leave the tech company and still be able to work in the same industry without being forced to try to make a living in a different industry for the duration of the non-compete clause or agreement. The limitation is that the former employee may not utilize a trade secret that their previous employer relied on to stand out against competitors as a way for the former employee to benefit their own business or their new employer. The courts weigh whether the agreement actually inhibits the employee’s freedom to pursue gainful employment and business opportunities but generally these agreements are unenforceable.
Employment agreements frequently prohibit a former employee from soliciting the company’s employees to come work for the former employee or their company. These non-solicitation agreements have been upheld in California. In order to uphold an employee non-solicitation agreement, the courts will consider whether the contract is reasonably lawful and what the possible impact would be on a business if an employee non-solicitation agreement is upheld and the employer lost their stable work force. California courts recognize that interference in an employer maintaining his workforce could affect his or her ability to stay in business. Therefore, as long as the non-solicitation agreement or clause in a contract is reasonable, it may be upheld.
Companies rely on vendors to either supply them with necessary resources for their business or sell a product the company produces. Non-solicitation clauses and agreements to prevent the poaching of a company’s vendors are generally enforceable in a way similar to non-solicitation of employees or customers. For example, an employee of a French restaurant specializing in a certain dish starts their own restaurant and tries to get a vendor of a particular specialty food with limited ability to supply more than a certain number of customers to supply the former employees’ new restaurant even though that vendor may have to cease or limit providing the specialty food item to the original restaurant. This would cause damage to the original restaurant’s regular business and cause an increase in competition. Therefore, a non-solicitation clause of the employment agreement would likely be upheld. On the other hand, if the vendor approached the new employee and indicated their ability to supply both restaurants because they are looking to supply more customers, that would not be solicitation and would be permissible.
Non-solicitation of customers is a more complicated issue to address. Generally, in California, Customer non-solicitation agreements are considered similar to non-compete agreements and are invalid and unenforceable under California law. This is because it is an unlawful restriction on trade and the right of the public to exercise its right to choose who it wants to do business with. However, any customer list an employer may keep in its regular course of business may be considered a trade secret and will be protected as such.
In cases where employers have client lists and data that they have taken time and effort to develop, non-solicitation agreements were only considered minimal restraints on employee mobility necessary to protect trade secrets. Some federal courts upheld this restraint as a reasonable exception to the prohibition against customer/client non-solicitation agreements, but in 2008 the California Supreme Court explicitly rejected this approach to the issue in Edwards v. Arthur Anderson when it held that non-solicitation agreements are de facto non-compete agreements. No matter how reasonable and narrow the restraints in the non-solicitation clause or agreement are, unless made lawful under applicable statutory exceptions, they still restrain an employee’s ability to engage in his or her chosen work, and are unenforceable.
These important things to know about non-compete and non-solicitation agreements in California can make a significant difference in the way your business contracts with its employees, vendors, and customers. The experts at Grant | Shenon (fka Alpert, Barr & Grant) are here to help you anticipate issues, mitigate problems, and protect your business in the long-term. Contact us today to schedule a consultation.
