You see it all the time – an employer demands an employee agree to the terms of a Non-Competition Agreement (“NCA”) as part of his/her employment. Neither party seriously considers the potential ramifications/enforceability of the NCA because they are both focused on the excitement of beginning their new working relationship. Subsequently, after years spent honing the employee’s skills and developing their craft, the employee demands something the employer is not willing to give – increased salary, new title, etc. Employers, falsely relying on the fact that they have an NCA in place, fail to recognize the danger of the employee leaving and working for a competitor and/or starting his/her own (competing) business. Unfortunately for the employer, NCAs are only enforceable in California in a very small set of circumstances.
The California Rule – Non Compete Agreements
Unlike most states where certain types of NCAs are valid and enforceable, in California, there are statutes that make NCAs void in most cases or subject to numerous exceptions as a matter of public policy. Therefore, as an employer, you need to find alternative means to protect your trade secrets and goodwill.
All of this does not mean that an employee can simply sign an NCA, resign, and then take proprietary information to a competitor while moving to a favorable state like California. Although it is true that in California NCAs are void and unenforceable, its laws must not be used as a “scapegoat” to try and get away with revealing proprietary information and avoiding previous contractual obligations.
Relevant Case Study: Advanced Bionics Corp. v. Medtronic (29 Cal. 4th 697 (2002)), modified en banc, reh’g denied (29 Cal.4th 1195A (2003)).
Medtronic, Inc. (Medtronic) was a Minnesota corporation that hired a senior product manager that was responsible for managing Medtronic’s neurostimulation products. Upon employment, the employee signed an agreement that contained a covenant not to compete. Soon thereafter however, the employee resigned and went to work for a California corporation called Advanced Bionics Corporation (Advanced Bionics), which was a Delaware corporation, but had principal headquarters in Sylmar California.
The employee and Advanced Bionics sued Medtronic in California for declaratory relief alleging that the covenant in his agreement with Medtronic not to compete violated California’s law and public policy. Medtronic removed the case to federal court and at the same time filed an action in Minnesota state court for breach of contract against the employee and tortuous interference with contract against Advanced Bionics. Medtronic sought to prevent the employee from working on a competing product that was being developed at Advanced Bionics.
The California Supreme Court found that the state of Minnesota had a greater interest in protecting the expectations of parties to an enforceable contract versus any potential interest that California had in trying to declare the non-competition agreement void and unenforceable. The court wanted to convey the idea that although California law and public policy disfavors non-competition agreements and offers in a way a “fresh start in life” for certain people, it does not offer a “protective shield” against previous valid contractual obligations.
The California Rule – Non-Disclosure Agreements
Unlike NCAs, a Non-Disclosure Agreement (“NDA”) is typically enforceable if drafted in an unambiguous and narrow manner. NDA seek to protect against the divulgement of secret, proprietary, and confidential information and prevents for example, new design, ideas, or unpatented concepts, private financial records, or business-specific trade-secrets from being freely disclosed to further someone else’s (i.e. a previous employee) business interest. NDAs are enforceable in that if there is a misappropriation of this “confidential information” to a competitor, then the owner of the information can seek an injunction or be awarded monetary damages as a result of its improper use.
The California Rule – Non-Solicitation Clauses
Many employment agreements will contain a Non-Solicitation Clause, which seeks to prevent the employee/contractor from soliciting employer’s employees, clients or vendors during employment and for a defined period after employment. These clauses are an effective way to prevent an employee or contractor from using the information they obtain as a result of their employment to benefit themselves at the expense of the employer. However, in order to be enforceable, a Non-Solicitation Clause needs to be carefully drafted by an attorney with knowledge of the parameters of what is allowed under California law.