A business needs to have a protective mechanism that secures important assets, such as human resources or trade secrets. This article explains the function of a non-compete agreement, the ineffectiveness of the non-compete agreement in California, and the other ways for a company to secure an important asset.
What is a Non-Compete Agreement?
A non-compete agreement is usually an agreement between two parties to agree not to enter or start a similar profession or trade in competition against another party. This agreement is commonly used to protect a company to safeguard its company’s trade secret and the assets they valued in their employees.
California’s Barrier in Enforcing a Non-Compete Agreement
Under the California Business and Professions Code Section 16600, it is unlawful for an agreement to restrain anyone from engaging in a lawful profession, trade, or business of any kind. In other words, the California law is prohibiting employers from stopping their employees to “hop” to other companies. This leaves a detrimental effect on employers who rely their businesses on employees’ talent. One of the industries that have been affected the most by this law would probably be the tech industry. This California law has been enacted since 1972 and it is claimed to establish a policy that will create open competition and employee mobility. Also, it claims to protect Californian’s rights in working in the businesses or occupations that they choose.
In California, non-compete agreements are void agreements, regardless of whether it is a reasonable agreement or not. An employer can be held liable for refusing to hire or fire an employee who refuses to enter into a non-compete agreement.
How to Protect Your Company Secrets
Although non-compete agreements are voided in California, there is still some tool available for California employers. Under California Business & Professional Code Section 16601-16602.5, a non-compete agreement may be enforceable against the seller of a business, a former business partner, or a former member of a limited liability company. Also, a California employer may lawfully prohibit their employees from using trade secrets. It would be prohibited for the former employees to use the customer lists to solicit the customers because the customer lists are the trade secrets of the company. Also, the former employees may be prohibited from using any confidential information that they obtain during the scope of employment.
Duty of Loyalty
California law recognizes that a duty of loyalty is owed by employees to their employer during their employment. A duty of loyalty is breached when employees divert corporate assets, opportunities, or information for personal gain. Sometimes, it is an affirmative defense to a wrongful termination claim when there is a breach of the duty of loyalty. However, in Mattel, Inc. v. MGA Entertainment, Inc., the Court held that a fiduciary relationship would be required to support that an employee had breached its duty of loyalty to his or her employer. Although the Court’s decision does not allow an employer to recover from a breach of the duty of loyalty, an employee who has a fiduciary duty to his or her employer is still liable for the breach.
Confidentiality Agreement
In California, a confidentiality agreement is enforceable. A confidentiality agreement is an agreement that one party promises another party not to disclose the key business information without permission. When a company needs an external party to develop a marketing plan for a product or obtain a loan for investment capital, confidential information may be revealed. To protect the company’s interest, a confidentiality agreement is sometimes signed by the employees or the external parties to ensure the security of the information.
A confidentiality agreement usually protects confidential information that is not covered by trade secrets. For example, client lists, business strategies, expansion plans, and confidential information of current employees are all confidential information that could be protected by a confidentiality agreement. However, a confidentiality agreement is unable to protect information that is known to the public or information that was learned by an employee beyond the scope of the employment. Also, a confidentiality agreement should explicitly define what information is confidential.
The Benefit of Legal Service
To better protect the company from having an important asset diverted, a strong team of attorneys may be needed. Attorneys can assist a company to draft the confidentiality agreement and provide legal advice on how to better protect the company under the current law. Our firm is experienced in serving both domestic and international clients. Also, we are experienced in drafting the agreement that best tailors to the company. Our scope of service regarding the protection of confidential information and trade secrets can assist the company’s growth.
Wang IP Law Group, P.C. is a Los Angeles based full service legal firm that specializes in intellectual property law (patent, trademark, copyright, and licensing agreement), business and commercial litigation, and a wide range of other legal matters including immigration, real estate, and landlord/tenant cases. Our multilingual attorneys represent clients from all over California and internationally from China, Taiwan, Hong Kong, Japan, and Israel.
If you have questions or would like a consultation in regards to the content of this publication, please contact us by calling (888) 827-8880 or email us at [email protected]. For more information about the firm and the services please visit www.TheWangIPLaw.com.