Employment Litigation Involving Non-Compete Agreements

Non-compete agreements continue to be the source of major litigation in California, largely due to legal changes that took place roughly two years ago. In 2024, both the Federal Trade Commission and the State of California sought to end non-competes, which they argued were unfair to workers. The FTC’s ban was struck down by federal courts, but the California ban is in full force.

California law strongly favors employee mobility and generally prohibits restrictive covenants that prevent people from seeking gainful employment opportunities. Not only can you no longer rely on non-competes to protect your business, but doing so could lead to fines and employment litigation. Therefore, your HR department and leadership team must adapt to the new landscape.

Our guide unpacks the current stance on non-competes in California and provides some practical alternatives that you can use to protect your business and its trade secrets.

California Prohibits Non-Compete Agreements

California Business and Professions Code Section 16600 broadly states that contracts restraining individuals from engaging in lawful professions, trades, or businesses are generally void. In practice, this means you usually cannot:

• Prevent former employees from working for your competitors
• Restrict employees from starting a competing business
• Enforce broad post-employment restrictions
• Punish workers for accepting employment elsewhere

California courts have consistently interpreted these protections in a broad manner. The state is one of the toughest jurisdictions in the country regarding non-compete agreements. Using a standard non-compete agreement is going to expose your business to unnecessary risk.

Recent California Law Changes You Need to Know

On January 1, 2024, Senate Bill 699 took effect. The bill made it “generally illegal” for employers to enter into noncompetes with California employees. The language of the bill applies to any business entering into an agreement with workers based in California, meaning out-of-state and multi-state businesses that employ people in California are impacted by SB 699.

If you attempt to enter into employment litigation involving a non-compete agreement, the entire process is on thin ground. That’s because SB 699 rendered pre-existing non-competes unenforceable, unless they meet strict exception criteria. The law fundamentally changed how employers protect trade secrets and enter into contracts with employees.

Why Non-Compete Agreements Often Lead to Employment Litigation

Disputes involving restrictive covenants frequently escalate into employment litigation because they involve competing legal and business interests. Employers often seek to protect:

• Trade secrets
• Confidential business information
• Customer relationships
• Proprietary strategies
• Investments in employee training

Employees may argue that these agreements unlawfully interfere with their right to work or ability to advance. California’s near-blanket ban on non-compete agreements means that most of this terminology in contracts is unenforceable.

The state’s hard-line stance on non-competes has made it difficult to protect company culture and trade secrets. Or has it? The reality is that you can still effectively insulate your business from theft of trade secrets and unauthorized disclosure of confidential information. What you cannot do is restrict employees from seeking jobs with your competition.

Attempting to enforce non-compete clauses, or anything that is overly similar to a non-compete, could lead to civil penalties against your business. Additionally, you’ll tie up time and resources in court. Perhaps worst of all, the entire incident could tarnish your reputation and make it more difficult to acquire quality talent.

Limited Exceptions Under California Law

California provides a few narrow exceptions to the ban on non-competes, which include:

Sale of a Business

The state may allow restrictive covenants if they are connected to the sale of a business or ownership interest. Courts sometimes allow these limited restrictions to protect goodwill during a purchasing process. However, these exceptions are evaluated on a case-by-case basis. Therefore, it’s vital to enlist the services of an experienced business attorney to assist with the sale of any business.

Partnership and LLC Dissolution

Certain agreements involving the dissolution of a partnership or LLC may also qualify for limited exceptions under California law. However, these exceptions are highly specific. Don’t assume that ordinary business concerns justify restrictive covenants. Anytime a partnership or LLC is being dissolved, the matter can become gray and complex.

Focus on Protecting Trade Secrets, Not Non-Competes

Since California has implemented broad limits on non-compete agreements, many employers rely on alternative legal protections to safeguard sensitive information. Here are some options you can consider:

• Confidentiality agreements
• Non-disclosure agreements
• Trade secret protection policies
• Proprietary information policies

Data security needs to be one of your top priorities, as does employee training. Educate your team members on confidentiality best practices to limit the exposure of your data. Additionally, you should limit each person’s access to information that is necessary based on their role and scope of work.

In general, California courts allow for NDAs and other restrictions meant to protect confidential information. Working with an employment litigation attorney to revise your contracts can help you use these protections to the fullest extent of the law.

Avoid Using Generic Employment Agreement Templates

One of the biggest mistakes employers make is relying on generic agreements. Sometimes, those agreements were drafted for states with different laws or for businesses in other industries. When revamping your existing contracts or reviewing a template to determine its suitability, you should avoid provisions that:

• Restrict future employment opportunities
• Bar workers from joining competitors
• Limit lawful professional activity

The courts tend to side with employees when contract language is overly broad or vague, especially if it appears that you are attempting to circumvent California protections.

The Importance of Retaining HR and Management

Your human resources department and management personnel are two of the best lines of defense against employment litigation. Make sure that both groups are trained on the latest best practices and understand California employment law.

Additionally, address proper confidentiality practices and how to protect your business without imposing non-compete style restrictions on workers.

Facing Employment Litigation? Pearlman, Brown & Wax, LLP Is Here to Help

The attorneys at Pearlman, Brown & Wax, LLP are experienced employment litigation lawyers. Our team represents California businesses in employment disputes, including those involving non-compete agreements. Contact us to schedule a consultation.