Restrictive covenants in California employment contracts cause considerable difficulties under California law. In this blog, we look at three cases that may guide employers in the drafting of more effective agreement.
D’Sa v Playhut
In D’Sa, an employee was asked to sign a confidentiality agreement containing a non-compete restrictive covenant, which would prevent him from working for a direct competitor for one year after the end of his employment. After refusing to sign, the employee was dismissed. The employee filed for wrongful termination, on the basis that the non-compete provision conflicted with public policy per the California Business and Professions Code. The court found the clause to be void on public policy grounds. The court also clarified that because of the public policy in California is in favor of employee mobility, non-compete clauses should be construed literally ? meaning, exactly as they are written ? leaving no room for a liberal interpretation that might make them otherwise enforceable in cases where they should be void.
Employee mobility vs. business protection
There is a long line of cases affirming the principle that rules inhibiting employees by restricting their ability to take employment with business rivals are unenforceable. In Metro Traffic Control, Inc. v. Shadow Traffic Network, a restrictive covenant prohibited an employee from carrying out traffic reporting services for a competitor while employed, and for one year after the end of his employment. The court ruled that the clause was unenforceable, since it restricted the employee’s mobility. Restrictive covenants can only be used as a means of protecting trade secrets ? clauses that do not seek to have that effect are unenforceable.
Loral Corp. v Moyes
In Loral, the court sought to distinguish between enforceable and unenforceable provisions. The Loral court stated that any clause that penalizes or prohibits an employee from working for a competitor after his or her employment has finished is invalid, unless it is necessary to protect trade secrets. A clause in which an employee agrees not to disclose customer lists, trade secrets, or solicit customers may be enforceable if drafted in a reasonably limited way.
For advice on drafting effective employment agreements, arrange to see an experienced California employment lawyer.