Non-Solicitation Agreements In Employment Contracts: Are They Enforceable in California?
By: Richard E. Korb[1]
A non-solicitation clause is a provision that can be found in an employment or severance contract given to an employee, and normally goes hand-in-hand with a non-compete agreement in the contract. The non-solicitation clause restricts the former employee from soliciting employees or customers from the former business in the event that he or she leaves the company and begin work in a similar industry.
Example:
“I will not, during my employment or for a period of x years after employment is terminated for any reason, directly or indirectly solicit or contact any clients of (Company) or any of its affiliates or subsidiaries with whom I have dealt prior my termination, for the purpose of selling any products or services to those clients which are substantially similar to, the same, or in competition with, the products or services sold by (Company) or any of its affiliates at the time of my termination.”
Are Non-Solicitation Clauses Enforceable In California?: A California Court of Appeal case found that non-solicitation clauses were void (unenforceable) under the ban on non-compete clauses that occurred in the 2008 court case, Edwards vs. Arthur Anderson LLP (insert cite). A non-compete clause attempts to restrict a former employee from entering the same trade or profession after departing from a company. Both clauses are in violation of California’s Business & Professions Code, Section 16600, which states: “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.”
Non-solicitation clauses follow the same two statutory exceptions as do non-compete clauses, which are outlined in the Business & Profession’s Code:
The first exception exists when there is dissolution of a Partnership or Limited Liability Company. The non-compete agreement is valid in enforcing a non-solicitation agreement between the departing partners, for a reasonable duration of time, upon the event that one withdraws from the partnership or company.
The second exception to a non-solicitation’s invalidity is when an owner is selling his or her ownership interest in a company to another. For example, if the owner of 500 shares in company X sells his shares to an owner of company Z, the owner of company Z can engage in a non-solicitation agreement with the former owner of company X. This is so he can restrain him from being in the same business and soliciting customers or employees away from company X (now owned by company Z) with his inside knowledge of customer/client lists and possibly cost and pricing details, or more.
A non-solicitation clause that falls under these exceptions still has to meet certain standards in order to be enforceable. These include only restricting the non-solicitation to reasonable activity, to a reasonable territory, and for a reasonable amount of time after the partner or shareholder leaves the company. The clause should also be explicit, and not specify too broad of limitations that would put any additional unnecessary restraints on business activity.
The California Supreme court made clear in Edwards vs. Arthur Anderson LLP that non-compete as well as non-solicitation, agreements can be enforceable under the Uniform Trade Secrets Act so long as the provision is included to prohibit employees from using the employer’s trade secrets after they leave the company. To be enforceable under the California Civil Code’s Uniform Trade Secrets Act, the limitations need to be restricted to information that meets three guidelines. The information qualifies for trade secret protection if:
(1) The company takes reasonable measures to protect the secrecy of the information;
(2) The information is not available to the general public; and
(3) The non-public information is valuable because it provides the company with an economic advantage.
Employers should tailor any non-solicitation agreement to express provisions only on information that would be considered a trade secret, and the actions restricted should be only those necessary to protect this information. If excess provisions are included, and the situation doesn’t fall under either of the two exceptions, the non-solicitation agreement is unenforceable.
The California Supreme Court also ruled that an employer who requires an employee to sign an agreement that contains such a clause, while not in the instance of either exception and not strictly limited to the protection of trade secrets, can be liable for tort damages for committing an “unlawful business practice.”
It is recommended, therefore, that an employer not require employees to agree to a non-solicitation provision unless the potential customers or clients are sufficiently private and valuable to be regarded as trade secrets, or unless the employee has access to information such as cost and pricing information that could be used to solicit business away from the former company.
[1] RICHARD E. KORB is a seasoned attorney with 30 years of business litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, bankruptcy and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2011
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