Employers may contemplate how best to protect their business when employees leave with knowledge, training, and experience to join competitors. While an employer may consider both non-competition agreements and nondisclosure agreements as helpful mechanisms, California treats these agreements very differently. Generally, nondisclosure agreements are the more effective and enforceable mechanism for protecting business interests and non-competition agreements are extremely disfavored.
History of Non-Competition Agreements in California
Historically, contractual restraints on the practice of a profession, trade, or business were enforceable if they were reasonable. (Hill Medical Corp. v. Wycoff (2001) 85 Cal.App.4th 895, 900.) In California, however, public policy strongly favors open competition. (Id.)
Indeed, under California Business & Professions Code § 16600, non-competition agreements that prohibit an employee from engaging in a lawful profession, trade, or business are void, unless an exception applies, such as agreements regarding the sale of the goodwill of a business. (Cal. Bus. & Prof. Code § 16601.) Generally, though, California courts have consistently interpreted section 16600 broadly. Thus, non-competition agreements are generally unenforceable.
Nondisclosure Agreements: The Protection of Confidential Information and Trade Secrets
In sum, an employer should not rely on non-competition agreements to protect its business interests. Rather, employers may protect confidential information and trade secrets through nondisclosure agreements.
Unlike non-competition agreements, nondisclosure agreements are primarily governed by the Unfair Competition Law (UCL), as opposed to section 16600. “The law of unfair competition generally prohibits former employees from disclosing or misusing an employer’s trade secrets and confidential information—even in the absence of contractual restrictions.” (Empire Steam Laundry v. Lozier (1913) 165 Cal. 95, 99.) California courts have likewise recognized that section 16600 does not invalidate an “employee’s agreement not to disclose his former employer’s confidential customer lists or other trade secrets or not to solicit those customers.” (John F. Matull & Assocs., Inc. v. Cloutier (1987) 194 Cal. App. 3d 1049, 1054.) Instead, section 16600 “invalidates an agreement penalizing a former employee for obtaining employment with a competitor, but does not necessarily affect an agreement delimiting how he can compete.” (Id.) In other words, California law generally prohibits agreements that restrict where an employee can work, but it still allows employers to protect themselves from a former employee’s wrongful conduct stemming from the improper use of the employer’s confidential information and trade secrets.
Accordingly, employers should focus less on non-competition agreements and more on nondisclosure agreements to protect its confidential business information and its trade secrets. Doing so will place employers in a better position to defend themselves against such wrongful conduct by former employees.
Best Practices
Employers should implement clear policies prohibiting the unauthorized use of confidential information and trade secrets. Additionally, maintaining operational procedures can demonstrate that the information is in fact confidential and treated as such. These safeguards can include restricted access, confidentiality markings, employee training, password protections, and detailed off-boarding with return-of-property procedures.
Most importantly, employers should utilize strong confidentiality agreements that clearly define confidential information and trade secrets and prohibit their unauthorized use during and after employment. Such agreements can provide employers with a basis for legal action should the former employee misuse confidential information to the employer’s detriment, while avoiding the risk that the agreement will be viewed as an unenforceable non-competition agreement.
JoLynn M. Klein is a shareholder at Hunt Ortmann Nieves Darling Mah Klein & Lozano, Inc. and leads the Firm’s Labor & Employment and Insurance Practice. She can be reached at klein@huntortman.com for further information and assistance.
Jessica Y. Shyong is an associate attorney in the employment practice group at Hunt Ortmann Nieves Darling Mah Klein & Lozano, Inc. Ms. Shyong defends employers in a variety of labor and employment matters, including wrongful termination, discrimination, harassment, and wage and hour litigation.
