How to Protect Valuable Intellectual Property despite California’s Policy against the Enforcement of Employee Covenants Not to Compete
Our firm is frequently contacted by companies and small business owners who request that we prepare agreements for them that would prevent or limit their employees from engaging in competitive work following the end of the employment relationship. Specifically, what many businesses are looking for is to include a “covenant not to compete” or “non-compete agreement” in the contracts that they enter into with new and current employees. These non-compete provisions typically seek to limit the former employees ability to engage in competition with their former employer by limiting the geographic scope in which the former employee may compete and by establishing a period of time during which the employee may not engage competition with the employer. For example, a standard non-compete provision might require an employee who resigns or gets fired from his or her position to refrain from engaging in a similar work, whether that be for a different company, customer, or client, within a 30-mile radius and for a period of two years. By including narrow limitations as to geographic scope and duration, these provisions may pass the legal muster required for enforcement in some jurisdictions across the United States, but not in California, where any such provision in a contract is deemed void and unenforceable. This strict public policy is embodied in California’s Business and Professions Code section 16600 which provides that, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The basis for this strict public policy is further stated by the California Supreme Court in Continental Car-Na-Var Corp. v. Moseley, 24 Cal. 2d. 104, 110 (Cal. 1944):
Every individual possesses as a form of property, the right to pursue any calling, business or profession he may choose. A former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted.
Once can understand why this is a good public policy –an individual’s right to make a living using the skills, expertise, and knowledge that they achieved through years of education and labor should surmount an employer’s right to prevent others from engaging in fair competition with them. Furthermore, the public and market at-large benefit from competition in the various industries and professions that serve us, as competition provides alternatives and allows us to reward competency and innovation. So why do employers seek non-compete agreements despite this public policy behind California’s refusal to enforce such agreements? One answer, which will be the focus of this article, is protecting a company’s intellectual property. Every company’s most valuable assets are their intellectual property –patented inventions, copyrighted works, trademarked brand names, logos, and slogans, trade secrets, and other proprietary information that makes them unique and competitive in the market. As these intellectual properties have great value to a company and can ensure their survival in a highly competitive market, employers are rightly concerned that they will hire people who will have access to, and ultimately vulture, these coveted intellectual properties. One can easily imagine a situation where a business savvy employee joins a well-known company to learn how its engineers successfully new tech products, only to leave after short stay to So what can employers do to protect their intellectual property, and are there any exceptions to California’s strictly enforced public policy against non-compete agreements?
Statutory and Common Law Exceptions to Non-Compete Agreements
There are three statutory exceptions to rule against enforcing non-compete agreements, which are respectively provided for in California Business and Professions Code section 16601, 16602, and 16602.5. The first exception permits any person who sells the goodwill of a business, or all of their ownership interest in a business entity, or substantially all of its operating assets and goodwill, to a buyer who will carry on the business, to agree with the selling party will not carry on a similar business within a specified geographic. The second exception permits a partner, upon the dissolution of a partnership or dissociation of a partner, to agree not to carry on a similar business within a specified geographic area, if the business will be carried on by the remaining partners or anyone deriving title to the business or its good will. The third exception permits a member of a limited liability company to agree not to carry on a similar business within a specified geographic area, so long as other members or anyone deriving title to the business or its good will caries on like a business. For some time, employers sought to draft other narrow exceptions which the common law appeared to permit, such as the one described in my example above in the first paragraph (limited duration and geographical scope); however, in Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937 (Cal. 2008), the California Supreme Court expressly rejected this “narrow restraint” exception, leaving it in the hands of the legislature to carve out any exceptions to Business and Professions Code section 16600. Despite this fact, there appears to be one common law exception which remains viable in California, known as the “trade secret exception”. A trade secret under California law is information that gives an employer a competitive edge in the market, but the company which enjoys its advantage must undertake reasonable efforts to maintain its secrecy. Both elements must be met for the information to be a protected trade secret. In some circumstances, an employer’s customer list may be found to be a trade secret, though this requires a fact-intensive analysis that one should seek an attorney to undertake. Following such an analysis, if a company is confident that its customer list is in fact a trade secret, then the trade secret exception prevents former employees from soliciting clients from that customer list.
So are you out of luck if none of these exceptions apply to you? Not exactly, there is still a lot that can be done to protect your valuable intellectual property assets.
Secure any and all Intellectual Property Rights
Well, the first thing that should be done by any competitive business is to seek out an attorney or law firm that practices intellectual property law in order to assess what proprietary information, ideas, inventions, writings, and other items may be subject to protection pursuant to the laws governing patents, trademarks, copyrights and trade secrets. While there are some states that offer common law protection for certain intellectual properties, securing those rights at the federal level and international level is required in order to enforce your property rights in various situations that a growing business is likely to face as it expands the reach of its products and services, as well its consumer base. Does your company have a catchy slogan? Someone else might be using it too, on the other side of the country. Does your company have an amazing new device that everyone will want to use? Someone else might be close to discovering the same device, and could be seeking a patent on it while you’re reading this article. Thus, it cannot be said enough, your intellectual properties are your highest-value assets –protect them at all cost! You might be thinking then, how do I protect these assets from early exposure by my employees, another equally important and high-value asset, whose loyalties may change.
Ask Employees to Sign Non-Disclosure and Confidentiality Agreements
While getting your intellectual property protected might stop your competitors from infringing on your rights by copying, selling, or redistributing your ideas or inventions, it may not stop an unscrupulous employee from sharing your valuable information about your business which could provide your competitors with an edge or allow them to steal your thunder. In some cases, the divulging of your proprietary information and ideas could throw a wrench into the process of protecting your intellectual property by means of a patent. Thus, another important step that any company should take is to ensure that its employees sign confidentiality or non-disclosure agreements, which can legally bind employees to keep confidential any proprietary or confidential information that they discovery, create, or work with during their employment. These agreements may not stop leaks of confidential and proprietary information, but they give employees a strong incentive to avoid disclosing such information because breaching confidentiality would expose them to a lawsuit.
In sum, it is important for any business with high-value intellectual property and a desire to have a competitive edge in the market to secure and protect these assets. Those employers who seek merely to control where and what sort of work their former employees can engage in following the termination of the employment relationship will be in for a rude awakening when they learn it is not legal to do so, while those who take the steps to adequately protect their intangible intellectual property assets from all angles will continue to compete and remain successful despite any loss of personnel. Our firm has drafted several non-compete and non-disclosure agreements, and we can help you determine whether your proprietary and confidential information can qualify as a trade secret. We have also secured several patents and trademarks on behalf of our clients, helping them protect their interests while maintaining a competitive edge in the market for years to come.