Friday’s 5 is here. This post covers five issues that commonly arise when dealing with employment contracts and non-competition/non-solicitation agreements. It is a very broad area to discuss, so, as always, this is a very general overview. However, employers and executives alike should have a basic understanding about the legalities and enforceability of such clauses in California.
1. At-Will employment, and Labor Code Sections 2924 and 2925.
California’s Labor Code section 2922 provides that employees are at-will: “An employment, having no specified term, may be terminated at the will of either party on notice to the other.”
However, if the employer and employee enter into a contract for employment, California’s Labor Code specifically sets out that the employer or the employee may terminate any employment contract for any willful breach of the duties owed to each other. Labor Code Section 2924 provides:
An employment for a specified term may be terminated at any time by the employer in case of any willful breach of duty by the employee in the course of his employment, or in case of his habitual neglect of his duty or continued incapacity to perform it.
Labor Code Section 2925 likewise provides:
An employment for a specified term may be terminated by the employee at any time in case of any wilful or permanent breach of the obligations of his employer to him as an employee.
2. Agreements restraining individuals from engaging in a lawful profession is void under Business and Professions Code Section 16600.
Employment contracts, non-competition agreements, and/or non-solicitation agreements can be challenged under Business and Professions Code section 16600. That Section provides a very broad rule voiding any contract that limits an employee’s ability to engage in their profession:
Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
3. Exception to Section 16600 – Narrow Restraint
One exception to Business and Professions Code Section 16600’s prohibition on restraining an employee’s ability to work is if the restraint is narrowly drafted. Restraints on the pursuit of “only a small or limited part of the business, trade or profession” have been upheld by California courts. As the court in General Commercial Packaging, Inc. v. TPS Package Engineering, Inc. explained, “[A] contract does not have to impair a party’s access to every potential customer to contravene section 16600…. [A] contract can effectively destroy a signatory’s ability to conduct a trade or business by placing a substantial segment of the market off limits.” General Commercial Packaging, Inc. v. TPS Package Engineering, Inc., 126 F.3d 1131, 1132–33 (9th Cir.1997)
There is also a strong public policy against enforcing agreements that restrict employee’s ability to work in the profession they chose. California Courts have noted, “the interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interest of the employers ….”
4. Exception to Section 16600 – Protection of trade secrets and to prevent unfair competition
As one court has noted, “Section 16600 has specifically been held to invalidate employment contracts which prohibit an employee from working for a competitor when the employment has terminated, unless necessary to protect the employer’s trade secrets.” Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 859 (1994). In addition, any such restrictions must be “carefully limited.” Id. at 861.
For example, in Gordon Termite Control v. Terrones, 84 Cal.App.3d 176, 179 (1978) the court refused to enforce an agreement prohibiting an employee from calling on any accounts he had called on while with former employer, finding “[k]nowledge of potential customers … is not a trade secret ….”
Moreover, the information must be an actual trade secret to obtain this protection. In Gordon v. Landau, 49 Cal.2d 690, 694 (1958), the court found that an agreement restricting a door-to-door salesman from using his former employer’s confidential customer list was valid under section 16600. However, in Letona v. Aetna U.S. Healthcare Inc., 82 F.Supp.2d 1089 (1999), the court rejected the employer’s argument that was seeking to protect information that qualified as a “trade secret” because “Aetna’s own admission that such information is ‘publicly available at Aetna’s website on the Internet” destroyed any argument that the information was secret.
5. Out-of-State employers must be cautious about using form agreements.
Employers should heed the warning issued by the court in Letona v. Aetna U.S. Healthcare Inc. to out-of-state employers using form agreements in California:
Aetna took the contract it uses in other states and, without regard to California law, and contrary to the clear prohibition contained in section 16600, compelled its California employees to sign it or be fired. Aetna’s claim that it should not be held responsible for wrongful termination unless it “knew” the provision was unenforceable misses the mark. Aetna knew it was operating in California and would be subject to its laws. Section 16600, or a version thereof, has been on the books since 1872. See Bosley Medical Group v. Abramson, 161 Cal.App.3d 284, 288, 207 Cal.Rptr. 477 (1984). It is not asking too much for Aetna to refrain from requiring its employees to sign presumptively illegal provisions and then firing them when they decline to do so.
Photo: Casa Thomas Jefferson