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Your Employee Matters


By January 1, 2013No Comments

Since the California Supreme Court decided Edwards v. Arthur Anderson, 44 Cal 4th 937 (2008), state law has been that Labor Code Section 16600 invalidates agreements with provisions that restrain employees from engaging in competitive employment after leaving a former employer, including non-solicitation agreements.

An agreement that is void under Section 16600 might also violate California’s Unfair Practices Act in Sections 17200 et seq. of the California Business and Professions Code. As a result, an employer could have a non-solicitation case and still face a lawsuit for unfair business practices.

Amazingly, the risk posed by restrictive covenants extends beyond the employer’s California employees. In the Application Group case, the court found that Section 16600, and by extension Section 17200, applied broadly to any “employment in California.” The court interpreted this term to mean: (1) employees living in the state; (2) employees living out of state, but hired by California employers; and (3) employees living out of state, but performing services in state. As a result, the court struck down the non-compete agreement of a Maryland employer with a former employee living in Maryland who was hired by a California employer.

Going on the offense, California employees, sometimes with the support of their new employers, sue in California state court seeking a declaration that any non-solicit agreement is unenforceable and that trying to enforce it would violate the Business and Professions Code.

Companies with “choice of law” and “forum selection” clauses in their your agreements, might be able to enforce such claims in their home state. Sometimes this can lead to litigation in two states which means spending a lot of money on lawyers. Although you might win a judgment in your own state, trying to enforce it in California will be another story.

In the end, good luck protecting anything but trade secret info – which means it that’ll you need to treat it as such. What in your business have you protected to that extreme?

P.S. Here’s the law defining trade secrets in California.