Protecting Business Trade Secrets and Non-Compete Agreements

In most states, checks on the practice of a trade, profession, or business are valid if realistic. California, however, has long rejected this path since 1872. California’s rule supporting generous competition is presently embodied in Business and Professions Code section 16600 which provides that ‘every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.’

California courts have consistently believed section 16600 to be an articulation of public principle which makes sure that each citizen keeps the right to practice every legal employment and pursuit of his or her selection. Thus, section 16600 sets forth the overall principle in California: Non-compete agreements are void.

Several statutory exemptions to section 16600 exist. Sections 16001 and 16002 allow broad non-compete agreements in two narrow circumstances: where a person sells the goodwill of a business and where a partner agrees not to compete in expecting of dissolution of a partnership.

Section 16601 shields the purchaser of a business from future competition from the seller, which may decrease the importance of the property right obtained. Section 16602 shields partners from the risk that a partnership’s goodwill will be diminished by competition from a withdrawing partner.

Section 16602.5, features that a member of a limited liability company can, upon or in preparation of dissolution of the company, agree not to carry on a parallel organization inside a particular geographic area.

California courts have held an array of non compete agreements void under section 16600. For example, an agreement not to render services to any business in connection with competing services for one year, or a veto on competing with an employer for one year within a 40-mile radius or soliciting previous employer’s past, current, or prospective clientele.

Likewise, covenants that penalize employees for competing with a previous employer are void under 16600.

Furthermore, it has for a while now been accepted that section 16600 does not quash noncompetition agreements where crucial to protect the employer’s trade secrets. Equity will steadily look after against the unfair disclosure of trade secrets . The misappropriation of trade secrets can comprise solicitation of an employer’s clientele when confidential information is used.

In the trade secret setting, the ‘trade secret exception’ to the ban against non-compete agreements does not mean that an employee can be banned from working for an employer, or be prohibited from soliciting the employer’s customers.

The California courts have similarly expressly refused the ‘inevitable disclosure doctrine’ under which it could be argued that an employee going to work for a competitor might automatically disclose his prior employer’s trade secrets.

Rather, the exception means that an organization can forbid its departing employees from competing against it by using its trade secret and confidential information. Past employees can still compete, but are required to do so fairly, on the same footing as any other competitor. Similarly, an enterprise cannot place past employees on a worse footing than other competitors by forbidding or penalizing any competition or patron solicitation. Brian Kindsvater is a Sacramento employment law attorney Law Office of Brian Kindsvater . On the website you will find information about California employment law, California non-compete agreements, and much more.

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