Retaining key personnel is vital to the success of any enterprise. But the law’s prohibition of trade restraints often makes it difficult for employers to protect their workforce and trade secrets. California law broadly 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.” (Bus. & Prof. Code, § 16600. See also Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.)
So what options do employers have?
The prohibition seems broad, but there are many common-sense exceptions. These exceptions allow businesses to protect confidential trade secrets, prevent “moonlighting,” and allow unions and professional associations, including physicians, to engage in exclusive bargaining agreements. Here is a summary of available protections notwithstanding California’s seemingly broad prohibition against trade restraints:
Covenants prohibiting the misappropriation of trade secrets are valid and specifically excepted from the purview of Business and Professions Code section 16600, et seq. (“Section 16600”). (E.g., Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242; Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1519.)
Fairness is a two-way street. California courts have consistently refused to recognize a right to engage in unfair competition. Employees may not enjoy “the gratuitous use of th[e] ‘sweat‑of‑the‑brow’ by others.” (Morlife, supra, 56 Cal.App.4th at 1520; Cont’l Car-Na-Var Corp. v. Moseley (1944) 24 Cal.2d 104, 110.) Before invalidating a non-interference or non-solicitation agreement, “[t]he potential impact on trade must be considered.”
This follows the observation of the California Supreme Court that “reasonably limited restrictions which tend more to promote than restrain trade and business do not violate the statute.” (Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268 at p. 276 (citing Muggill, supra, 62 Cal.2d at p. 242.) Moreover, it recognizes that “Section 16600 does not invalidate an employee’s agreement not to disclose his former employer’s confidential customer lists or other trade secrets or not to solicit those customers.” (Loral, supra, 174 Cal.App. 3d at p. 276 (citing Gordon v. Landau (1958) 49 Cal.2d 690, 694).)
While post‑engagement restraints are often invalid, “in‑term” covenants that prevent workers from “moonlighting” are not invalid. (E.g., Dayton Time Lock Serv., Inc. v. Silent Watchman Corp. (1975) 52 Cal.App.3d 1; IPA v. IPA Lock Co. (2002) 101 Cal.App.4th 1443; Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1427-29.)
Collective Bargaining Agreements:
Exclusive bargaining covenants, according to the California Supreme Court, are designed “not for the purpose of restricting any trade or business, but for the purpose of promoting one.” (Great W. Distillery Products v. John A. Wathen Distillery Co. (1937) 10 Cal.2d 442, 445-46.)
Exclusive Dealing Agreements:
Exclusive dealing covenants are not per se invalid, as they often “provide an incentive for the marketing of new products and a guarantee of quality-control distribution.” (Dayton Time Lock, supra, 52 Cal.App.3d 1, 6.)
Edwards v. Arthur Anderson Did Not Abolish These Exceptions:
Employees often cite the 2008 case of Edwards v. Arthur Andersen as a watershed that abolished the “rule of reasonableness,” and with it many of these exceptions. Not so: the so-called “rule of reasonableness” concerned temporal and geographical restrictions on an employee’s subsequent employment. It did not abolish the exceptions described above.
Moreover, the so-called “rule of reasonableness” was rejected not in 2008 with Edwards but over 140 years ago in 1872 with the enactment of Civil Code section 1673, the predecessor to Section 16600. (Edwards, supra, 44 Cal.4th at p. 945; Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288 (“At least since 1872, a non-competition agreement has been void unless specifically authorized by sections 16601 or 16602.”).
Thus, it is misguided to suggest that Edwards somehow reached back in time and struck down every later case upholding the validity of these important exceptions. In reality, in-term restraints (Dayton Time Lock, supra, 52 Cal.App.3d 1), exclusive dealing agreements (id. at p. 6), exclusive bargaining agreements (Great W. Distillery Products, supra,10 Cal.2d at 445-46), restraints against unfair competition (Morlife, supra, 56 Cal.App.4th at 1520), and restraints against the disclosure of trade secrets (Muggill, supra, 62 Cal.2d at p. 242) are all still alive and well.
Of course, it is especially critical to draft employment contracts carefully, as courts often construe offending provisions against the employer. As always, a small error in the beginning is a great one at the end, and an ounce of prevention is worth a pound of cure.
*** The information presented here is general in nature and is not intended, nor should be construed, as legal advice for a particular case. This post does not create any attorney-client relationship with TVA. For specific advice about your particular situation, please contact TVA for a consultation or consult with your own attorney.