Non-Compete Clauses in Employment Contracts
Employers may need to revise existing employment contracts to assure compliance with current law because of a case recently decided by the California Supreme Court, Edwards v. Arthur Andersen. In Edwards, the Court confirmed the strong public policy of the state of California prohibiting non-compete agreements which prevent or limit an employee from soliciting or working for competitors of a former employer (except in limited circumstances discussed below). The California Supreme Court also rejected the “narrow restraint” exception previously used by the Ninth Circuit which purportedly allowed non-compete agreements so long as they were “narrowly restrained” or limited in scope. Despite the ruling in Edwards, employers are not without remedy. There are several recognized statutory exceptions which allow an employer to limit or prohibit solicitation of its customers or clients. For example, prohibition may be permissible during the sale or dissolution of a corporation, partnership, or limited liability company and when a customer list is protected as a trade secret.
Employers should keep in mind that the Edwards decision does not affect covenants not to compete during the term of employment. An employee has a duty of loyalty to his or her employer under the Labor Code. This allows an employer to include provisions in an employment contract which require an employee to devote his time, interest, and effort to the performance of his job. This duty of loyalty also allows an employer to prohibit current employees from engaging in activities competitive with the employer’s business while employed by it.
However, it is important to remember that after Edwards, noncompetition and nonsolicitation clauses and agreements prohibiting former employees will generally be held invalid unless they fall under one of the statutory exceptions discussed above or the trade secrets exception. Employers, with the assistance of counsel, should review all employment agreements to determine whether their existing noncompetition and nonsolicitation provisions are enforceable. Because this is a complex area of the law, we encourage you to contact an attorney at Vogt & Resnick, LLP to discuss appropriate measures to ensure that your business complies with this current law.