Employee Compete Agreements – Unenforceable

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From HRCalifornia Extra newsletter, August 2008, California Chamber of Commerce

The California Supreme Court confirmed that non-competition agreements are unenforceable in California. Agreements that restrict an employee’s ability to pursue similar employment after leaving a job are prohibited, even if narrowly written and leave a substantial portion of the available employment market open to the employee. Unless a non-competition agreement clearly falls under one of the following exceptions, it will be unenforceable in California:

  • Trade secrets protections, which can legally restrict an employee’s ability to use confidential information or company-defined trade secrets.
  • Sale of a business, which can legally restrict a seller’s ability to compete with the buyer in the geographic location where the seller had carried on his or her business.
  • Dissolution of a partnership, which can legally define a geographic area within which one of the partners cannot conduct a similar business.

The Court reiterated the law in California that non-competition agreements are against public policy because they restrict an individual’s ability to earn a living. Further, the Court found that requiring a former employee to get a release of an invalid agreement constitutes unlawful interference with the employee’s rights. In addition, a waiver of “any and all” claims is not an illegal waiver of employee indemnification rights unless the waiver specifies that indemnification is being waived. Edwards v. Arthur Andersen LLP (August 7, 2008) 2008 Cal. LEXIS 9618.

What Should You Do?

  1. Do not restrict employees’ ability to work after they leave your employment through non-competition clauses.
  2. If you have offices in other states, be sure to consult with legal counsel regarding how to handle non-competition policies for California employees as the law in this area differs by state.
  3. Waivers should be narrowly tailored and specify what claims are being waived.