Non-Compete Provisions in General/California

What is a non-compete?

Even though this entry fits into the “Deciphering Jargon” category, you just might be able to discern the meaning and purpose of a non-compete provision.

A non-compete provision is often written into an employment agreement, and essentially sets forth limitations on how the employee may compete with the employer after the employment relationship ends.

The purpose of such a provision is fairly clear.  Employers want to prevent employees from working for their direct competitors, using specific information gathered from their company against them.  The information itself can be detrimental, and even the act of disclosing it can hurt them, for example a business segment opportunity where being the first mover would be beneficial.

For example, Bob is head of product development at Fundco, but leaves to join Widgetco, Fundco’s direct competitor.  Bob has intense knowledge of Fundco’s target demographics, and what features the users want.  Fundco’s advantage over the competition is now diminished, if not non-existent.

What makes a non-compete enforceable?

Undoubtedly, some of you are thinking that it can’t be possible for such a restrictive provision to actually be legal!  What happened to Adam Smith, the laissez faire, and capitalism?

The short and extremely simplified answer is that non-competes arguably increase capitalistic endeavors, by protecting employers from losing all of their proprietary information as soon as their first employee leaves.  And more importantly, there are strict limits on the powers of a non-compete.

Though courts will differ occasionally, there are generally four factors of evaluating non-competes:

(1)    The geographic scope must be reasonable
(2)    The length of time must be reasonable
(3)    The non-compete must be necessary to protect a legitimate business interest
(4)    The type of business restricted must not harm the public.

(3) simply refers to the non-compete actually being necessary for the employer to protect his business, while (4) refers to the fact that non-competes will never apply to doctors, for example.

Okay, so what about California?

Section 16600 of the California Business and Professions code states that non-competes are simply illegal in California.  Small print: there are two exceptions, (1) involving the sale of a business, and (2) dissolution of a partnership or an LLC.   Easy.

For real world context, imagine how many employees you know that shuffle between technology companies here in San Francisco.  Overall, allowing such a pattern of employment is mutually beneficial for both the companies and the employees.


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