Question:

I would like to require my employees to sign an agreement under which they will agree to not to compete with me or solicit my clients after their employment is terminated. Is this legal?

Answer:

Probably not. The type of agreement you are referring to is a “non-competition” agreement. With limited exceptions discussed below, non-competition agreements are not enforceable under California law. California has a well-settled public policy favoring open competition. Therefore, an agreement that restricts your former employees from directly competing with you after their employment terminates would likely be unenforceable under California law.

California law generally provides that agreements cannot restrain anyone from engaging in a lawful profession, trade, or business of any kind. California courts have construed this law to invalidate agreements that restrict competition. The exceptions to this law, which allow agreements restraining competition, occur where:

  • the restriction is necessary to protect an employer’s trade secrets or confidential information; or
  • the restriction is provided in connection with the sale of a business, in which case the seller may be restricted from competing with the buyer, or the sold business, within a specified geographic area; or
  • the restriction is provided in connection with the dissolution of a partnership, or disassociation of a partner, in which case a partner can agree to not compete with the other partner, or the partnership, within a specified geographic area.

The application of each of the above exceptions is determined by the circumstances in each case, and, as such, the terms of a clause or agreement and surrounding facts must be analyzed in each instance. For example, if your client list is a trade secret, the first exception may apply and you may be able to restrict your former employee’s ability to use the client list to solicit your clients. This is a complex area of law, and in order for the exception to apply, an employer’s trade secrets generally must fall within the definition of “trade secrets” under the Uniform Trade Secrets Act (“UTSA”). While the UTSA does not specifically mention customer or client lists as trade secrets, the definition of trade secret is inclusive rather than exclusive. Some California courts that have analyzed whether client lists are trade secrets under the UTSA have focused on whether the information is valuable because it is not known to others, and whether the owner of the client list has attempted to keep the information secret.

If your client list does not constitute a trade secret, the agreement you suggest, restricting your former employees from soliciting your clients, may be unenforceable as a restraint on competition under California law – unless one of the other exceptions applies. If, however, your list of clients constitutes a “trade secret” as defined under the UTSA, then the non-solicitation portion of the agreement may be enforceable under the trade secret exception to the California law against restraints on competition. In such event, your agreement should be carefully drafted, providing a definition of information that constitutes your confidential and trade secret information (i.e., client lists), and should set forth the behavior to be restricted in connection with such trade secret and confidential information.
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