Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In California
California law specifically forbids any employment contract that restrains anyone from engaging in a lawful profession, trade or business of any kind. Although several California Federal courts have found such agreements enforceable within very narrow exceptions (eg: a restriction from doing business with one specific customer), the California Supreme Court has taken a very strict view of the statute's language. In a case decided in August of 2008, the Supreme Court reiterated this view and stated that "if the legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect." (Edwards v. Arthur Andersen, LLP, No. BC 294853 (Cal. Aug. 7, 2008)
Even though the law explicitly forbids these kinds of restrictions, the courts have heard cases involving them. They have consistently declared any kind of restriction on an employee's ability to work as void and against public policy. Some examples are:
- An 18-month non-solicitation restriction on a former employee of a tax services company that prohibited the employee from providing services to any of the former employer's clients for a year.
- A 1-year restriction on traffic reporters from providing services to any television or radio station.
- A geographic restriction on solicitation of remaining employees by a former employee in a California company's Indiana office was deemed to be invalid.
However, the courts have recognized a judicially created exception in the case of trade secrets or unfair competition. California adopted the Uniform Trade Secrets Act in 1984 which, among other things, codified the exception that had been allowed by the courts.