A non-compete agreement can often be used to protect business interests, such as trade secrets and client lists. It can be used to prohibit employees who have been terminated, either voluntarily or involuntarily, from soliciting existing clients of the business or from working for a competing business.
In California, non-compete agreements are governed under the Business and Professions Code section 16600, which states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Therefore, in general, non-compete agreements are unenforceable in most circumstances since they seek to restrict an employee from engaging in a specific area of business. There are only a few, very limited, circumstances in which a non-compete agreement can be enforced.
Sale of goodwill or interest in a business
Goodwill is considered an intangible asset, where the value of the business is attributed to the expectancy of continued patronage of existing customers, which can be due to the business’s name or reputation. Other factors include loyalty to individual employees and/or co-workers. Due to this, when goodwill, or other similar interest, in a business is sold, the buyer can request that the seller be prohibited from working in a similar business. This applies to a specific geographic area, provided the buyer continues the same, or similar, business using the goodwill and/or interest.
Dissolution of a partnership or a limited liability company
Similar to the sale of goodwill or interest, if a partnership or a limited liability company (LLC) is dissolved or sold, a partner or member of the LLC can be prohibited from working in a similar business within a specific geographic area.
Protection under the Uniform Trade Secrets Act
The Uniform Trade Secrets Act (UTSA) offers some protection to employers if employees leave and attempt to take their customers. The UTSA can protect employers if 1) an actual trade secret is involved and 2) misappropriation of the trade secret is occurring or is threatened. A trade secret is some form of information that derives independent value, either actual or potential, by not being known to the public or any other people who could profit from its use. Additionally, reasonable efforts need to be made to maintain the secrecy of this information.