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Enforceability of Non-Compete Agreements and Non-Solicitation Agreements

When you are entering into an employment contract with a new employer, when you are renewing your employment contract, if you receive a promotion or raise, or if you wish to receive a severance package when your employment is terminated, etc. you may be required to execute a non-compete agreement and/or non-solicitation agreement.

The employer may require you to sign the agreements before you are able to gain employment, continue employment, receive the promotion with that employer, or receive the severance package. But what are non-compete and non-solicitation agreements and are they enforceable? Can employers require you to sign the agreement in consideration for employment?

Non-Compete Agreements

Non-compete agreements are contracts usually between an employer and an employee. Typically, in a non-compete agreement, the employee agrees not to “compete” with the employer for a given period of time after the employee stops working for the current employer. This can be an agreement not to work for rival companies or competitors. It can also include an agreement that the employee will not contact current clients of the employer in an attempt to solicit business. Finally, a non-compete agreement typically also prevents an employee from starting a business of his or her own, in direct competition with the current employer. This type or portion of a non-compete agreement normally covers a specific area or region of the country.

Limitations on non-compete agreements include both length and scope. The length of time the employee is bound by the non-compete agreement must be “reasonable.” A year is considered a reasonable amount of time for a non-compete clause. Ten years would likely not be considered reasonable by a court. The scope of the agreement is also limited. For example, the non-compete agreement may limit an employee from working for a direct competitor. However, it would be unreasonable (and therefore unenforceable) to include a clause prohibiting the employee from working anywhere in the world in any type of job for a period of one year.

Enforceability

With very few exceptions, non-compete agreements are not enforceable in the state of California. California Business and Professional Code (BPC) § 16600 states that contracts “by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind” is void as to that clause of the contract.

Exceptions

There are certain situations wherein a non-compete agreement will be legal and enforceable in the state of California. For example, if you are selling a business or your ownership interest in a business, you can, as part of the sale, enter into a contract with the buyer agreeing to “refrain from carrying on a similar business within a specified geographic area” which covers the area the business currently operates, as long as the buyer owns the business. California BPC § 16601.

Another situation wherein a non-compete agreement is legally enforceable in California occurs during the dissolution of a partnership or the disassociation of one of the members of the partnership. In that case, the parties can enter into an agreement wherein the partner leaving the partnership will not engage in a similar business within a defined geographical area as long as the other partner or partners continue to carry on the business. California BPC § 16602.

California’s BPC also contains a provision for using a non-compete agreement where there is a dissolution of a limited liability company. Further, if a single person’s interest in a limited liability company is terminated, a non-compete agreement can be used, with terms and conditions identical to dissolution of partnerships or sales of businesses.

Non-Solicitation Agreements

A non-solicitation agreement is also a contract. In a non-solicitation agreement, an employee agrees not to solicit the employer’s current customers or clients after the employee leaves the employer. The agreement could prohibit the employee from contacting clients on his or her own behalf, if the employee starts his or her own business, or it could be on behalf of another business, if the employee now work for a competitor.

A non-solicitation agreement can likewise prohibit an employee from soliciting his or her co-workers, and other employees within the current employment, to recruit them to work for the employee’s new business.   This would also extend to recruiting for an employee’s new employer.

Enforceability

The short answer to whether non-solicitation agreements are enforceable in California is “maybe.” As a general rule, an employee is bound by a reasonable contract that prohibits an employee from soliciting former clients or employees of the employer. However, there is nothing that would prohibit a former employee from reviewing and considering a former co-worker’s application for employment that arrived unsolicited.

Similarly, depending on the language of the non-solicitation agreement, one may be prohibited from contacting and actively recruiting clients of the former employer. However, there may be a situation where a client contacts the employee’s new business and places an order. These types of agreements can be very fact specific.

Timing

In the limited circumstances where a non-compete agreement is allowed, as well as where an employer requests a non-solicitation agreement, these can be signed at any time. Non-solicitation agreements may be included as a matter of course with any new employee, or the employer may request it at some point during the employee’s employment.

Because courts have upheld non-solicitation agreements, it is critical that non-solicitation agreements be reviewed and completely understood before signing. Under no circumstances should you grant an employer’s request to sign a non-solicitation agreement after you have provided two weeks’ notice of termination of employment.

What to Do if Asked to Sign a Non-Compete or Non-Solicitation Agreement

If you have been asked to sign a non-compete agreement, or a non-solicitation agreement, it is a good idea to have an employment attorney review the agreement on your behalf. Employers will naturally write the agreement in a manner that is most favorable to them. Ensuring your rights are protected is critical. Employers should give you the opportunity to have an attorney review the contract prior to signing.

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