What is a Non-Compete Agreement?

June 17, 2022

A non-compete agreement is a contract that restricts an employee’s ability to work for a competitor or start a competing business after termination of employment. These agreements may also be referred to as non-competition contracts, covenants not to compete, or non-compete clauses. 

Non-compete agreements are often used in high-tech and other intellectual property industries, such as the medical industry. Employers are often concerned about losing crucial information, trade secrets, or other intellectual property to competitors in these industries. 

If an employee has access to sensitive information, a non-compete agreement is meant to protect that information from being disclosed or utilized by a departing employee.

Problems With Non-Compete Agreements

Non-compete clauses can protect a company’s trade secrets and confidential information. However, they can also give one competitor an unfair advantage over another. 

For example, let’s say you work for Company A and are responsible for creating a new product. You create an innovative product that competitors - Company B and Company C - want to start selling it. You decide to leave Company A to work for Company B. 

Before starting your new job, Company B tells you that you cannot work for them unless you sign a non-compete agreement.

What Does California Law Say About Non-Competes?

Non-compete agreements are generally prohibited under California law against former employees. California courts have found that non-compete agreements violate public policy and an employee’s right to proceed in their chosen profession.

Generally, non-compete agreements are only enforceable if one of three circumstances applies: 

  • Between partners in a partnership
  • Between members of an LLC
  • In connection with the sales of a business

In these circumstances, the non-compete must be limited in time, scope, and geographical area.

Non-Compete and Non-Disclosure Agreements

There are some similarities between non-compete agreements and nondisclosure agreements (NDAs). While non-compete agreements restrict an employee’s ability to work for a competitor or compete with their former employer, NDAs generally restrict employees’ ability to disclose certain information. 

Typically, NDAs are signed by people who have had access to sensitive information and want to protect that information from being disclosed to others. 

For example, a company executive who is privy to insider information about a pending merger might sign an NDA that prevents them from telling others about the merger. NDAs are legally enforceable because California law does not have specific restrictions regarding them. 

This means that any private individual, company, or other entity can legally enforce an NDA.

Johnson v. Maxim Healthcare Services, Inc.

This case demonstrates that non-competes do not hold up in court in California, and what you can do if your employer has pressured you into signing one. 

Maxim Healthcare Services Inc. required its employees, including Gina Johnson, to sign a non-compete agreement. She did sign it, but over three years later, while still working under Maxim, she filed a lawsuit alleging claims only under the California Private Attorneys General Act (“PAGA”) on behalf of herself and other aggrieved employees. 

Johnson requested that Maxim rescind the agreement, or it would be seen as a “continuing violation.” However, the trial court Johnson’s request and the suit were denied, which dismissed the PAGA action because an individual claim for this violation has a three-year limitations period, which it was filed outside of. 

The court of appeal reversed the trial court’s judgment and ruled that an individual’s claim who is time-barred can still pursue PAGA action. 

When it comes to PAGA, however, the plaintiff can only recover civil penalties on behalf of both themselves and other aggrieved employees. 

PAGA Action

If your employer has or is pressuring you to sign a non-compete form, don’t let them! It will be void under California law, but you can still pursue action against them with PAGA should a former employer attempt to enforce a void non-compete agreement against you. PAGA allows wronged employees to file lawsuits against employers to recover civil penalties of which 75% of the recovery goes to the State and 25% of the recovery goes to the aggrieved employee. PAGA actions are available for certain California Labor Code violations.

People also ask

Are any non-competes enforceable in California?

As a general rule, California courts will not enforce non-compete agreements. That is because non-competes are contrary to public policy, which favors open competition and mobility within the workforce. 

California’s Business and Professions Code Section 16600 states that contracts restraining the right to engage in a lawful profession, trade, or business "are void." This statute has been interpreted to mean that California's non-compete agreements between employers and employees are unenforceable. 

What does signing a non-compete mean?

Non-competes are contracts that many employees must sign when starting a new company.

In California, non-compete agreements are generally unenforceable. However, signing one means that an employee agrees not to work in a particular industry or at a specific company, even if they are terminated. 

It has been found that many employees don’t read the paperwork or understand what they’re signing. Many employees also sign non-compete agreements because they want the job, even if they are not fully aware of what the agreement means for future career possibilities.

However, under Labor Code Section 432.5, “No employer, or agent, manager, superintendent, or officer thereof, shall require any employee or applicant for employment to agree, in writing, to any term or condition which is known by such employer, or agent, manager, superintendent, or officer thereof to be prohibited by law.” This statute has been interpreted to mean that employers are prohibited from requiring employees to sign any agreement that violates California law - including non-compete agreements.

Final Thoughts

While non-competes agreements are a common practice among employers, courts in California have found them to be generally unenforceable. 

However, this doesn’t mean that employers will never try to enforce them. It’s important to remember not to sign any document until you fully understand what you are agreeing to. If you are asked to sign a non-compete, you should consult with a lawyer before you do so.

If you are an employer, you need to think twice before you ask employees to sign an agreement that you know violates California law.


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