Confidentiality Agreements Can Be Unenforceable Covenants Not to Compete

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Hirschfeld Kraemer LLPIn Brown v. TGS Management Company, LLC (2020) Cal. App. LEXIS 1074, the California Court of Appeals, Fourth District, recently held, in a case appealed from a trial court decision affirming an arbitration award in favor of the former employer of the plaintiff, an equities trader, that the arbitration award should be vacated and that the confidential information clause in the employee’s employment agreement was so broad that it violated California’s strong public policy against covenants not to compete, since its practical effect was to prevent the employee from ever trading securities in any capacity for the rest of his life.

Section 16600 of California’s Business and Professions Code provides that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” There are statutory exceptions in sections 16601, 16602 and 16602.5 for noncompete provisions relating to sales of businesses, dissolutions of partnerships or dissociations of a partner from a partnership, and a dissolution of a limited liability company or a termination of a member’s interest in a limited liability company, but not for noncompete provisions against former employees.

The appeals court decision is a timely reminder that although reasonably tailored confidentiality provisions that protect an employer’s trade secrets and proprietary information will be enforced, overbroad clauses that have the practical effect of a covenant not to compete will not be enforced.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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