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BEWARE OF EMPLOYEE NON-COMPETITION AGREEMENTS It is not unusual for employment contracts to contain a provision that the employee cannot compete with the employer’s business for a period of time after termination. California law has only allowed such "covenants not to compete" in the case where the party agreeing not to compete is selling a business or an interest in the business to the other party. The Business and Professions Code has prohibited such agreements not to compete based on employment relationship as an unlawful restraint of the employee’s right to pursue their trade and occupation. This is different than many other states in which such employee non-competition agreements are permitted. D'Sawas employed by Playhut, Inc., in the City of Industry under an oral employment contract. After he was hired, the company presented him with a confidentiality agreement that he was required to sign. The agreement prohibited him from disclosing, both during his employment and after, the company's trade secrets and confidential and proprietary information. These restrictions are totally lawful under California law. The confidentiality agreement, however, also prevented D'Sa from accepting employment with any of Playhut's competitors for one year after the termination of his employment. Furthermore, the agreement required him to notify the company if he went to work for any of its competitors for five years following his separation. Such a covenant not to compete is unlawful in California. When D'Sa refused to sign the confidentiality agreement, his employment was terminated. He then sued, claiming he had been wrongfully terminated because Playhut's confidentiality agreement, while containing lawful trade secret protections, also contained a covenant not to compete that violated California law. The trial judge dismissed his lawsuit, finding that the confidentiality agreement contained technical "severability" and "choice of law" provisions that allowed the illegal non-compete agreement to be separated from the lawful confidentiality provision.
Even though such agreements were prohibited by law, many employers included them in employee agreements as measure of warning and intimidation to an employee who might be tempted to take their know-how and go to work for themselves or some one else. The California Court of Appeal, in one of the most significant cases ever involving this subject, has ruled that an employer who insisted that an employee sign a confidentiality agreement including an unlawful covenant not to compete wrongfully discharged the employee for refusing to sign the agreement. The Court of Appeal found that Playhut’s inclusion and insistence on the non-compete clause in the confidentiality agreement violated a strong public policy in favor of the right of California citizens to work and against enforcing covenants not to compete. The court noted that it is rare for an employee to understand legal technicalities or to retain a lawyer to advise them that a covenant not to compete is enforceable. The court found the fact that Playhut could have enforced the confidentiality provision of the agreement did not justify terminating D’Sa for refusing to sign an agreement that also contained an unlawful covenant not to compete. It is crucial that all employers review their confidentiality agreements to insure that they do not contain unlawful covenants not to compete. Employers doing business in California that are headquartered out-of-state are especially at risk because they may have covenants not to compete that are lawful in their home state but illegal in California. The inclusion of an unlawful covenant not to compete in confidentiality and non-disclosure of trade secret agreement may invalidate the entire agreement and increase the employer’s risk of liability to a discharged employee. In that case, having no confidentiality agreement at all would be better than having one with an unlawful non-compete provision. Kent A. Hansen is the managing attorney of Clayson, Mann, Yaeger & Hansen in Corona. The firm represents businesses and employers in transactional and employment matters. This column is provided for the general information of the readers of _____________________, and does not constitute legal advice. Readers desiring further information or advice should consult legal counsel.
2/20/01 \tata\MIS\CHAM-COL.201 |