Protecting Business Trade Secrets and Non-Compete Agreements

In a good number of states, checks on the practice of a profession, trade, or business are defensible if rational. California, however, has for a long while rejected this route since 1872.

California's rule favoring open competition is 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 declared section 16600 to be a manifestation of public rule which ensures that each citizen maintains the right to work at every allowed employment and enterprise of his or her picking. Thus, section 16600 sets forth the over-arching policy in California: Noncompete agreements are void.

Several statutory exceptions to 16600 exist. Sections 16001 and 16002 permit varied non-compete agreements in two tight conditions: 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 buyer of a business from subsequent competition from the seller, which might harm the value of the property right attained. Section 16602 shelters partners from the possibility that a partnership's goodwill will be diminished by competition from a withdrawing partner.

Section 16602.5, enacted in 1994, provides that a member of a LLC can, in anticipation of dissolution of the company, reach agreement not to carry on a similar company in a precise area.

True to the statute's mandate, California courts have held a mixture of non-compete agreements invalid pursuant to section 16600. For example, an agreement not to deliver services to any person or entity in connection with competing offerings for a year, or a proscription on competing with an employer for one year within a 40-mile radius or soliciting former employer's previous, present, or potential clients.

Also, provisions that penalize employees for competing with a previous employer are void under 16600.

In addition, it has for a while now been documented that section 16600 does not invalidate agreements not to compete where necessary to shield the employer's trade secrets. Equity will always protect against the unmerited disclosure of trade secrets . The misuse of trade secrets can include solicitation of an employer's clientele when confidential information is used.

In the trade secret circumstance, the 'trade secret exception' to the prohibition against non-compete agreements does not mean that an employee can be barred from working for an employer, or be banned from soliciting the employer's clients.

The California courts have similarly expressly refused the 'inevitable disclosure doctrine' under which it could be assumed that an employee going to work for a competitor may automatically tell his previous employer's confidences.

Rather, the exception means that a business can prevent its leaving employees from competing against it by using its trade secret and confidential information. Prior employees can still compete, but must do so fairly, on the equivalent footing as any other competitor. Likewise, an enterprise cannot place leaving employees on an inferior footing than other competitors by prohibiting or penalizing any competition or customer solicitation.

Brian Kindsvater is a California attorney specializing in non compete agreement and trade secret issues. Go here to read his in-depth articles about California Non Compete Agreements.