Businesses are constantly looking into ways to protect their interests when it comes to their employees and competing businesses. One of the questions we regularly receive is whether businesses can employ non-compete, or non-competition agreements within their employment structures to protect their employees from leaving for competitor firms. Unfortunately, the legal landscape continues to largely restrict these types of agreements.
California maintains the strictest stance on non-compete agreements in the United States. Under Business and Professions Code Section 16600, nearly all employment non-compete clauses are strictly void and unenforceable. The legislative rationale is that the State does not want to allow businesses to contractually restrict an employee’s freedom of commerce in the job market.
Recent legislation has aggressively expanded this framework. Senate Bill 699 prohibits employers from attempting to enforce or enter into non-competes, regardless of whether the agreement was signed outside of California. Additionally, Assembly Bill 1076 makes the mere inclusion of an unlawful non-compete clause in an employment contract a civil violation, exposing employers to private rights of action, statutory damages, and attorney fees.
Despite this broad prohibition, businesses can legally use non-compete agreements in very narrow, specific corporate contexts:
- Sale of a Business: Under Section 16601, a person who sells the goodwill of a business, disposes of all ownership interest, or sells all operating assets can agree to a geographically and temporally limited non-compete to protect the buyer’s value.
- Dissolution of a Partnership: Section 16602 allows partners to agree that they will not carry on a similar business within a local geographic area once the partnership is dissolved.
- Dissolution of a Limited Liability Company (LLC): Similar to partnerships, retiring or departing members of an LLC can enter into restrictive covenants upon the dissolution of or dissociation from the entity.
Outside of these narrow corporate ownership and restructuring exceptions, standard employee non-competes are completely prohibited in the State. Employers must instead rely on robust confidentiality agreements and the protection of trade secrets under applicable law to safeguard proprietary business information.
Therefore, we are suggesting that in lieu of unenforceable non-compete agreements which may expose you to civil damages, businesses use strong confidentiality and trade secret clauses as a replacement for competition restrictions. While these clauses are not as strong, they at least offer the employer a level of legal protection against employees stealing sensitive information and sharing it with a competitor. These clauses can legally be incorporated into employee handbooks and employment agreements without running afoul of the State’s non-competition clauses.