02 Oct Upcoming Changes to California Laws on Non-Solicits
Ending an employment relationship can often be ugly and result in ongoing conflicts between the ex-employer and ex-employee. One of the biggest issues occurs when ex-employees decide to compete with their former employers by bringing existing clients to their new places of business or using confidential information from the ex-employers in their new businesses.
These types of issues are generally dealt with on a state-by-state basis because most employment-related disputes are regulated by state laws. And as most employers and employees in California know, the Golden State is an employee-friendly state, legally speaking. For example, non-compete clauses in employment contracts have been invalid in this state for a long time as a matter of public policy.
California Business and Professions Code 16600
What makes non-compete clauses in employment contracts illegal in California is a combination of California Business & Professions Code 16600 and dozens of years of court decisions interpreting it. That portion of California state law makes any contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind illegal. The courts have taken this to mean that non-compete clauses are an unlawful restraint on trade, and that has generally been extended by California courts to include nonsolicit clauses, as well.
What is considered a nonsolicit clause has been in dispute since the courts declared them unlawful. In the past, most courts have struck down nonsolicits as a veiled attempt to enforce non-compete clauses, but there are exceptions to this general rule. One of the ways companies seek to enforce both non-compete and nonsolicit clauses is to include a lot of the same activities and label them as using trade secrets and confidential information. This approach has resulted in mixed results.
Federal Court Decision Changing Nonsolicits
Despite the history of California courts striking nonsolicit clauses as unlawful under section 16600, a recent decision by a federal court in California could change all that. In this case, the court upheld an employment contract clause that prohibited an ex-employee from soliciting clients of his former employer and from using confidential information acquired from the former employer.
This case involved many of the issues facing employers today as they draft and seek to enforce employment agreements under California law. It is not clear how different courts will treat this case, or whether it marks an impending change in how we interpret nonsolicit clauses and how to use them in employment contracts. Because it is a deviation from the normal behavior of judges, however, it must be taken into account going forward.
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