A non-compete agreement or clause, also called a covenant not to compete, is used in employment contracts to get one party (usually an employee) to agree not to enter into or start a similar profession or trade in competition against another party (usually the employer).
Non-compete agreements are most common in high-technology, corporate, and sales fields, but they are spreading to professions such as hair stylists, chefs, camp counselors, yoga instructors, and exterminators. As non-compete clauses proliferate, litigation to enforce the agreements has also increased.
California bars non-compete clauses except in very limited circumstances, and is known as one of the most difficult places to enforce a non-compete agreement. California’s noncompete statute 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.” The statute lists a few exceptions related to the sale of a business.
California courts, including the California Supreme Court, allow a non-compete agreement if it protects an employer’s trade secrets. California reconciles this exception with the statute’s bright line prohibition against non-competes by explaining that in protecting trade secrets, a non-compete may restrict how an employee may compete without restricting that employee’s right to earn a living. In other words, a non-compete cannot prevent a former employee from working for a competitor, but it can prevent that employee from using a client list or other trade secret information from his former employer to compete.
Currently only California and North Dakota ban non-compete clauses, but courts in most states won’t enforce them unless there is a legitimate business reason for the agreement, it is narrowly tailored, and it is reasonable in scope and duration. Still, companies with non-compete agreements are spending money and hiring lawyers to ensure their clauses are enforced and their business property is protected.