A non-compete agreement is an agreement in which an employer restricts the ability of an employee to work for a competitor, normally out of fear that the employee will share trade secrets with the competitor. A non-compete agreement may be a stand-alone agreement or a clause in another agreement such as an employment agreement.
Every state restricts non-compete agreements to some degree or another. In most states, the restrictions prevent the employer from exercising too much control over the employee’s job prospects after he has already left his position with the employer. Although California’s restrictions on non-compete agreements are the strictest in the nation, some loopholes exist.
Non-Compete Agreements Can be Applied during the Course of the Employment Relationship (But Not After)
Most states allow an employee to promise that he will not work for the employer’s competitor for a certain period (two years, for example) after he leaves his current job. California does not allow this. However, California does allow an employee to agree not to “moonlight” with a competitor while he is still employed with the employer.
A Company Buyer Can Enforce a Non-Compete Agreement against the Seller
When someone sells a business, the “goodwill” of that business is often considered a major part of the value of the business. Goodwill is an intangible part of the value of a business, beyond its physical property or even intangible intellectual property rights, that is normally associated with the value of the business’s good reputation.
When someone sells a business, “goodwill” can often be quantified as a specific dollar value and it belongs to the buyer once the purchase is completed. For the seller to compete with his old company would be for the seller to deny the buyer the benefit of his bargain with the seller. For this reason, California courts allow business buy/sell agreements to contain non-compete causes.
Non-Compete Agreements Can Be Enforced Among Business Partners and LLC Members
Business partners and LLC members are generally considered to be more sophisticated and less in need of protection than the average employee is. Moreover, partners and members have a direct economic stake in the outcome of the business, in much the same way as the buyer of a business does. For this reason, California allows partners and members to enforce non-compete agreements against each other.
Loopholes That Don’t Work in California
The following strategies will not allow you to circumvent California’s ban on non-compete agreements:
Granting an employee shares simply so that he can enter into a non-compete agreement as a “partner” or “member.”
Compensating the employee for agreeing not to compete.
Using a choice of law clause to select the law of a state that allows non-compete agreements.
Waiting to Pursue Your Claim Can Only Hurt Your Chances
At CKB Vienna LLP, we are committed to the aggressive and principled representation of our clients. Our lawyers handle a wide range of matters including employment agreements, non-compete agreements, and employment litigation. We serve clients from all over Upland, Fontana, Ontario, Chino Hills, Claremont, Rancho Cucamonga, including Alta Loma and Etiwanda. Call us at 909-980-1040 or fill out our online contact form to learn how we can help you resolve your issue.