California Supreme Court: Non-compete clauses are not enforceable

The California State Supreme Court has ruled that non-compete clauses in employment contracts are not enforceable in California. I'm reminded of the study from the Duke Center for the Public Domain that concluded that the reason that the tech corridor on Route 128 near Boston had grown so much more slowly than Silicon Valley was that Massachusetts has enforceable non-competes, while California does not. The researcher concluded that in California, the best talent moved to the best companies, while on Route 128, crummy companies could lock up great people for years at a time through non-compete agreements.

Note that none of this invalidates confidentiality agreements -- you're still not allowed to disclose secrets -- but you're allowed to work for whomever will hire you, without the cold dead hand of your last boss tugging on your belt.

Californians have the right to move from one company to another or start their own business and can't be prohibited by their employer from working for a competitor in their next job, the state Supreme Court ruled Thursday.

In a unanimous decision, the justices said state law since 1872 has forbidden what are called noncompete clauses that restrict management employees' options after they leave a company.

State Supreme Court rejects noncompete clauses (via /.)

• [ivan256]

  #9: Same citations as the aforementioned Wikipedia article. (Which conveniently contains all dead links to case law).

  Technically, non-competes are legal, but the “Reasonableness” clause is all but insurmountable unless you’re in flagrant violation, in which case you are almost certainly violating the trade secret law which makes your non-compete “reasonable” anyway. (In other words, you’d be prevented from competing even in California)

  In the only tech industry case cited in that Wikipedia article (EMC Corp. v. Gresham), Gresham (the employee) won.

• [Sean Eric FAgan]

  I can tell you that some bosses are going to be pretty nervous once they hear about this decision.

  Only pretty ignorant ones — the law that this decision was based on was well over a century old! And any lawyer would have advised them that a non-compete clause was questionable, at best.

  The real thing that happened by this was ensuring that all the courts in the state used the same standard — before this, they’d applied the law differently.

• [Chris Spurgeon]

  This CA Supremes decision may accomplish a couple of other good things:

  1) If some CA employers ignores his attorney’s advice and DOES attempt to come after a former worker with a non-compete attack, the employer has a stronger counter-suit.

  2) The publicity from this ruling may help other states see the evil of this law, which may help those states get rid of their versions. Freedom on the march!

• [Sister Y]

  The California Business and Professions Code (Section 16600) says (from leginfo:

  16600. 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.

  Then there are a couple of exceptions, such as the sale of a business. No exception for employee non-competes.

  The mid-level appellate courts have, as Sean Eric Fagan says, disagreed as to whether 16600 means what it says when applied to non-compete clauses, and this new opinion, Edwards v. Arthur Andersen, says it means what it says, no contracts in restraint of trade, including all employee non-compete clauses.

  But in most districts they’ve been reliably unenforceable all along.

  Chris Spurgeon, as to Point 2, let’s hope so!

• [Takuan]

  so does this mean all those talentless hacks that were able up to now to pimp themselves out as fronts for capable people suffering under non-competition clauses will now be thrown out of “work”? What am I gonna do!?

• [zuzu]

  What am I gonna do!?

  Outsource to people living in India?

  Whoring out your citizenship to people who can’t get a work visa will be the new trend during the crashing economy. It’s practically de rigueur in Dubai.

• [zuzu]

  Non-compete clauses are an epic fail from the perspective of incomplete contracting and contract theory generally.

• [legalblahblah]

  Can anyone tell me if this agreement is valid?:

  GENERAL NON-DISCLOSURE AGREEMENT
  I. Introduction

  This is an agreement-executed on____________(date) between ___________________ (Employee) and _________________ (Company), in which the Employee agrees not to disclose confidential trade secrets or other confidential information belonging to Company.

  II. Agreement

  In consideration of Employee’s relationship with Company, Employee agrees to keep all trade secrets and/or proprietary information of Company in strict confidence both during and after expiration or termination of this agreement.

  Employee agrees not to make use of research done and all work/products created in the course of work done for Company while employed by a competitor of Company and acknowledges these to be intellectual property of Company. Employee understands all research, marketing and products/ideas created for Company are the sole property and intellectual property of Company and may not be taken or used elsewhere upon termination of employment.

  Employee agrees not to create unfair competition as a result of the employee’s knowledge of trade secrets and intellectual property, within a radius of 15 miles of Employees address of employment with Company for a period of 2 years following the expiration or termination of employment. Employee acknowledges this to be a restriction regarding intellectual property and trade secrets and does not limit the employee’s ability to participate in Employees trade, business or profession. Employee name agrees to pay liquidated damages of $1.2 million if any violation of this paragraph is proved or admitted.

  III. Trade Secrets

  A trade secret is any information, process, or idea that is not generally known in the industry, that Company considers confidential, and that gives Company a competitive advantage. Examples of trade secrets include:

  . Name, addresses, phone numbers, web sites, email addresses relating to clients, customers, vendors and contacts
  . Name, addresses, phone numbers, web sites, email addresses of contacts who are business related whom do not do business with Company or it’s clients, but who are obtained as contacts while Employee is employed by Company.
  . The names, phone numbers and address of any people who currently work for or have worked with Company in the
  past
  . Our marketing techniques including locations established for marketing, promotional items, reports, files, health talks, seminars, and any other marketing items
  . Our specialized equipment, customized software or other programs, etc. used to achieve industry edge
  . Concepts for current or future business plans.
  . All records related to the information we obtain related to current or future clients, customers, partners, and projects
  . All materials and information used in training, Company pricing, pay scales, future projects, budget, and any other materials or information obtained from Company while contracted not aforementioned.

  Employee understands that the above list to be illustrative and that others trade secrets, which shall also be held confidential, may currently exist or arise in the future. In the event that Employee is not sure whether certain information is a trade secret, Employee shall treat that information as confidential unless Employee is informed by Company to the contrary.

  Employee agrees to surrender to Company all equipment, records, contact lists and documentation that was used, created, or controlled by Employee during employment upon termination or end of employment. Also, subsequent end of employment, Employee agrees to not use any trade secrets that have been learned while employed by Company. NOTE: Any materials attained, created or drafted while employed by Company is the sole right and intellectual property of Company.

  IV. Attorney Fee

  If any legal action relating to this agreement arises, the prevailing party shall be entitled to recover all costs, expenses, and reasonable attorney’s fees incurred.

  V. Duration

  This agreement is considered by both parties to be a binding contact and shall remain if effect indefinitely, even if Employee’s employment with company is dissolved.

  IV. Execution

  This agreement is executed on the date above and covers all Company trades secrets and proprietary information currently known to Employee as well as all trade secrets that shall become known during Employee’s tenure at Company.

• [yannish]

  I just finished wrapping up with a former employee in a situation identical to this. The non-compete is non enforceable (and has been for years in CA) but the confidentiality agreement still stands, and is remains enforceable.

  In the EU they have it right, at least from the employees standpoint. If a company wants you not to compete, fine, they have to pay you not to work. So if you have a 2 year non-compete, you receive 24 months pay, plus often a penalty clause. Obviously these are rarely enforced by employers.

• [Chris Spurgeon]

  Sweet! I got locked in by a non-compete clause in Pennsylvania and lived in fear that by irrational ex-boss was going to pop up on day and sue my ass for working for another tech company out of spite.

  Now I live in California, and am FREE of those shackles! SUCK IT former employer.

• [Sean Eric FAgan]

  I haven’t read the decision (I’m at the slow end of a slow link this week), so I am not sure just how broad this decision was.

  I’ve never had a employer offer me a contract that said I simply couldn’t work in my field at all; however, I’ve seen people who’ve been offered compensation to delay. During the dot bomb, in particular, people being laid off, and given (say) 4 months salary in exchange for not working for a competitor for a year or two. Does this decision affect those, and if so, how? Anyone know?

• [moonpost]

  I never signed a non-compete with my former employer but after almost 11 years, when I left to start my own business, they sued me on circumstantial evidence (out of context emails) and fabricated accusations. 10 months later I was still in court fighting this attack and spending a lot of my time and money. Net effect: a non-compete. In the end, I “won” and they had to go away. But just because a non-compete can’t be enforced, don’t think you can’t be kept from your desired work.

• [Duffong]

  This is really sweet news, because after 5 years of working for a selfish bonehead, I decided to start my own company modeled after his (product line that is)… but with way better engineering and customer service. I wasn’t really worried because I spoke with two different lawyers before I started, but at least now it’s more of a validation to read this.

  I really believe that if you think you can do it better, that no one should be able to tell you otherwise in a non-compete… I mean, what’s the point of the virtue of capitalistic creative destruction if you can’t move ahead with a better product?

  YAY for me and others out there who believe in the principle of “better”.

• [ivan256]

  Must have been some study, since Massachusetts has never had enforceable non-competes, and California has apparently had them until now.

  As a software engineer working outside of Boston for the last decade (only really idiotic companies open inside 128 where the talent is the same, but the costs of business are 2-3x. Yes, your anecdotal successful company that opened downtown or in Cambridge is still idiotic.) I can tell you that there is no problem moving from company to company, and the very few lawsuits I’ve seen over non-competes have always ended poorly for the company who tried to enforce the agreement.

  It hardly matters anyway. A company can sue your for violating their non-enforceable non-compete just as easily as they can for an enforceable one. Either your new employer is going to pay to defend you, or you’re screwed.

  If anything, the difference in growth of the computer industry between the Boston area and San Jose area is due to investor interests.

• [Nick Mathewson]

  I once had the representative of a prospective employer try to get me to sign such a non-compete clause by telling me, “Don’t worry, it’s unenforceable anyway.” This made me mistrust the company pretty badly: there aren’t many reasons to include terms in your contracts and have your tell prospective employees that those terms are unenforceable.

  Well, not many ethical reasons, at any rate.

• [boingboing ate my name]

  #6
  “If anything, the difference in growth of the computer industry between the Boston area and San Jose area is due to investor interests.”

  Are you saying that investors prefer San Jose for reasons other then investment?

• [Nick Mathewson]

  Ivan256 @ #6: Must have been some study, since Massachusetts has never had enforceable non-competes, and California has apparently had them until now.

  Citation, please? What you say does not jibe with (for example) the wikipedia page on non-competes in Massachusetts, or with any of the first few hits on the topic I could find. I would be quite interested to learn that I was wrong in my earlier understanding of Massachusetts law.

• [Anonymous]

  I had a friend who was a retail clerk at one of those storage and container companies in Washington State in the late 90′s where they had her sign a non-compete agreement and threatened her with some unspecified action after she got a job as a store manager with the other storage and container retailer. Luckily I happened to have read a newspaper article about non-compete agreements just a few days before and was able to tell her that it was obviously unenforceable. They went away when their bullying didn’t work.

  There did not seem to be any particular law explicitly saying it was unenforceable, but such things had been through the courts multiple times and it had been repeatedly found that non-competes were only valid for high level executives. The article was talking about how they are virtually never even valid for highly paid software developers and project managers. In fact the courts take such a dim view of such clauses that they will sometimes invalidate the entire employment contract if such a clause is in it.

  Thus companies that try to apply non-competes inappropriately actually run a risk of loosing the otherwise enforceable parts of their employment contracts.

• [Bill Albertson]

  I was waiting to see how this played out in the state’s highest court. I am in a non-compete in CA, but wasn’t sure whether the law applied to my situation, and if the decision was settled. Now that I have a clear and probably final word from the highest court in the state, I can move on. I can tell you that some bosses are going to be pretty nervous once they hear about this decision.

  Now, the only thing left for CA to do is enable some form of public health care, and then I can feel safe to start my own business full-time instead of depending on someone else’s larger business for the much needed benefits. There would probably be a massive boom in small business startups in CA if the health care issue was also resolved in favor of smaller operators.

• [Anonymous]

  Which is why whenever I’ve been offered a job and there is a non-compete clause, I rebut with a (non-compete) contract that includes moving expenses (if it’s a local non-compete), includes re-education and living expenses (four-year undergrad at the lvery least), includes 150% severance pay (for the duration of the non-compete clause), or excludes the non-compete clause. They are silly and an insult to prospective employees.

  The one I did sign, we compromised, I got the company to pay me 50% of department revenues (the department never had had any revenue streams nor was it geared to earn revenue prior to hiring me). They thought they suckered me, twas the other way around. I lived off of that four years of work for years.

  @9-Nick: If you can afford it, non-competes are easy to defeat. Rare is the court that sides with the employer. Meaning, the only reason non-competes “work” in states that allow them is because most ex-employees don’t fight employers because of the costs.

• [Kyle Goetz]

  I didn’t see anyone talking about this in the comments, but people on Slashdot were asking about this yesterday: the decision only applies to people in CA and has virtually no effect on any non-compete elsewhere.

  The decision was highly CA-specific, making frequent references to California statutes, and the issue in question was specifically targeted at a specific CA statute that literally said non-competes were void.

• [ivan256]

  #8: I’m saying that most venture firms invest locally, and the local investors interests drive the types of businesses that receive capital in any given locality.