How Can Non-Compete Agreements Be Successfully Enforced?
Non-compete agreements are a critical component of employment and business contracts. They are designed to protect businesses from unfair competition. However, enforcing these agreements can present legal challenges, especially in California, which has stringent laws governing non-competes.
At William B. Hanley, Attorney at Law, I strive to help my clients understand how non-compete agreements can be enforced, what California law says about them, and why you should hire a skilled litigation attorney if you're involved in a business dispute.
What Are Non-Compete Agreements?
Non-compete agreements (NCAs) prohibit an employee, partner, or contractor from competing directly with a company during or after their time there. These agreements typically prohibit an individual from working for a competitor of their previous employer or starting a similar business in a specific geographical area for a certain period.
The primary goal of a non-compete agreement is to protect a company’s proprietary information, trade secrets, and customer relationships. When enforced correctly, a non-compete can protect a business from losing the advantages it worked hard to develop. However, while these agreements are standard, they aren’t always enforceable.
Non-Compete Agreements in California
California is one of the most restrictive states when it comes to the enforceability of non-compete agreements. Under the California Business and Professions Code Section 16600, most non-compete clauses are considered void and unenforceable. The law reinforces the state’s public policy of prioritizing the freedom to work and promoting fair competition.
However, there are limited exceptions to California’s strict stance on non-competes:
Sale of a business: A non-compete clause may be enforceable if it is tied to the sale of a business. For example, if a business owner sells their company, they may be restricted from opening a competing business in the same area for a specified period.
Partnership dissolution: Non-competes are also permitted under certain circumstances when a partnership or LLC is dissolved.
Protection of trade secrets: Employers can protect proprietary information through trade secret laws, even though a non-compete may not be enforceable.
Protection of customer relationships: Non-compete agreements may be enforceable if they are narrowly tailored to protect the legitimate interests of the employer, such as customer relationships. This means that non-competes may be upheld if designed to prevent an employee from directly soliciting or servicing the employer's customers after leaving the company.
Confidentiality and trade secrets: Non-compete agreements can protect an employer's confidential and proprietary information, trade secrets, and intellectual property. In California, non-compete agreements designed to prevent the disclosure or use of such confidential information may be enforceable if they are reasonable in scope and duration.
Since California courts strictly scrutinize the enforceability of non-compete agreements, employers should be careful when drafting them to make sure they comply with California law, maximize the likelihood of enforceability, and protect the rights of both employers and employees. Violations of California non-compete laws can lead to significant consequences, including civil penalties and claims for damages.
California employers often rely on alternative agreements, such as non-disclosure agreements (NDAs) or non-solicitation agreements, which are more likely to be enforceable and can provide similar protections without violating the state’s laws.
How to Enforce a Non-Compete Agreement in California
Given the strict laws in California, enforcing non-compete agreements requires careful planning, drafting, and an in-depth understanding of the laws themselves. Some strategies for successfully enforcing non-competes include the following:
Tailor the agreement to applicable laws: Employers operating in California must make sure their non-compete agreements comply with state-specific laws. Collaborating with a skilled attorney can help determine whether the agreement qualifies under allowable exceptions like the sale of a business.
Focus on protecting trade secrets: Even in California, businesses have the right to protect their trade secrets. Employers can enforce non-competes when they are tied to protecting confidential or proprietary information. Courts are more likely to side with an employer if a former employee is attempting to misuse sensitive data.
Rely on non-solicitation clauses: Rather than prohibiting direct competition, businesses in California can use non-solicitation agreements to restrict former employees from poaching clients or staff. While these agreements aren’t bulletproof, they are more likely to withstand legal challenges than traditional non-compete clauses.
Consider alternative states for enforcement: If an agreement involves employees or business operations outside of California, the enforceability may depend on the jurisdiction. Some states have more employer-friendly rules regarding non-competes, so contracts must clarify which state’s laws govern the agreement.
Enforce provisions selectively: For agreements in states where non-competes are enforceable, it’s essential to apply them judiciously. Courts often strike down overly broad restrictions on competition. Instead, narrow and specific terms are more likely to hold up in court.
Consult an experienced business litigation attorney: Enforcing non-compete agreements is a complicated process, especially in states like California. Partnering with an experienced attorney can make all the difference. An experienced attorney understands the nuances of the law and can provide strategic advice to enforce or challenge them effectively.
Common Challenges in Enforcing Non-Competes
Attempting to invoke a non-compete agreement often leads to several challenges, particularly when employees dispute its validity. Some common issues may include:
Overly broad restrictions: Courts are unlikely to enforce agreements that are too broad in geographic scope, time frame, or restricted activities.
Violation of state laws: If the agreement conflicts with local or state statutes, it may be deemed invalid.
Lack of consideration: Agreements signed after employment begins may be invalid if they lack fair consideration (e.g., additional compensation or benefits).
Business Litigation Attorney Serving Irvine and Newport Beach, California
At William B. Hanley, Attorney at Law, I believe in standing up for people who have been wronged. With over 40 years of legal experience and recognition as one of California’s most accomplished civil trial attorneys, I have successfully represented individuals and businesses across Irvine, Newport Beach, Orange County, Los Angeles County, and San Diego County. Reach out to me today to schedule a consultation.