top of page


Competition and Customer Lists

Non-Competition Agreements at 100mph

**Note: Non-competition agreements go by a number of names, including “restrictive covenants” and “no-compete clauses.” In this article I give you a 100mph overview of non-competition agreements. You might try to use a non-compete agreement to stop your employees, contractors and others from competing against you. To give you my conclusion up-front, California law generally voids a non-compete agreement, but permits you to use trade secret protections to stop unfair competition. CALIFORNIA LAW GENERALLY VOIDS NON-COMPETE AGREEMENTS The law of non-competes in California is simple on its face – a contract by which one is restrained from engaging in a lawful trade or business is to that extent void (CA B&P §16600). That is, a contract is void if it prohibits one from engaging in a particular industry. The law applies to all types of relationships, including employer / employee, client / contractor and franchisor / franchisee. IN-TERM AND AFTER-TERMINATION NON-COMPETES A non-compete can apply during the term of the relationship (“in-term”), and/or after termination of the relationship (“after-termination”). For example, the non-compete can try to restrict a contractor’s competition while he is under contract, and after termination of the contract. CA law is slightly different for in-term and after-termination non-competes. In-Term CA law on in-term non-competes is as clear as mud. CA courts will void an in-term non-compete if it cuts off competition in a “substantial share of a business, trade or market.” This is a fact-driven determination and it is impossible to predict the outcome of any given case. After-Termination Most non-compete cases occur after-termination of the employment or contractor relationship, when the former employee or contractor tries to stay in the industry on his own. CA law will void nearly every non-compete that applies after termination of the relationship. DON'T BE TOO AGGRESIVE Clients frequently tell me they want the non-compete agreement to scare the employee or contractor, even though the client knows it’s unenforceable. This is not smart. CA courts have permitted punitive damages against companies that are overly aggressive in their use of non-competes. THE BIG BACKDOOR - TRADE SECRETS When your non-compete fails, use trade secret law for protection. Even though CA courts void non-competes, they protect trade secrets. You can use trade secret law to stop unfair competition, that is, prevent the employee or contractor from using your business methods and other secret information to compete against you. A trade secret is information that is secret and that has competitive value. Any information can be a trade secret so long as it meets these two requirements – secrecy and value. The formula for Coca-Cola is the classic example of a trade secret. Other information can be a trade secret too, for example, a customer list. A customer list can be a trade secret if the information is not easily obtained from public sources (e.g. a phone book) and contains valuable information developed through effort and expense (such as customer preferences and purchasing tendencies). If your employee or contractor plans to compete against you, he might use your trade secrets to do so. It might be hard for him to start over completely from scratch. This is especially true if you taught him how to do business in the first place or you introduced him to all the important contacts in the industry. CA law will stop the employee or contractor from using your trade secrets against you. This in turn will help prevent him from unfairly competing against you.

Can a Former Employee Steal Your Clients?

If you have customers, you might wonder, “can my employees set up a competing business and steal my clients?” From the employee’s perspective, the question is “Can I take customers with me to my new business?” Let me give you a brief roadmap of the relevant issues. NO-COMPETE CONTRACT ISN'T WORTH THE PAPER IT'S WRITTEN ON After termination of employment, a contractual non-competition clause usually is not enforceable. Under California law, an employee ordinarily may compete with his or her prior employer, even if the employee signed an agreement that prohibits competition. Of course there are exceptions to this rule. In brief, a non-competition clause can be enforceable if it was (i) entered into as part of the sale of a business; or (ii) entered into pursuant to a partnership agreement or shareholders agreement that prohibits a withdrawing employee’s competition in a limited geographic area. WHO GETS THE CUSTOMERS? Although a prohibition on competition may be unenforceable, the departing employee still may not unfairly steal customers. What is unfair? In general, the law will prohibit an employee from using the customer list of the former employer if: (i) the customer list was a trade secret; and (ii) the former employee misappropriated the list. As to the first element, a customer list can be a trade secret when the employer has invested much time and effort in creating it and has kept it secret. A protected customer list can contain, for example, information about the particular needs and interests of the customers. As to the second element, once the employer has proven that the customer list is a trade secret, it then must prove that the employee misappropriated the list. Here the issue is whether the departing employee solicited the customers, as opposed to merely announcing a change in professional affiliation. In other words, the employee may announce his or her new status to the employer’s customers, but may not go any further. To go further would be to solicit the customers, which is prohibited. The distinction between solicitation and mere announcement is a shifting line, and the departing employee must take great care not to cross it. WHO GETS THE RANK AND FILE EMPLOYEES? The rule on the solicitation of office managers and other employees is similar to the rule for the solicitation of customers. In general, California law protects the right of employees to change employment. A departing employee, however, may not solicit or ask other employees to leave the former employer. Rather, the departing employee may only announce his or her plans. The employee must then back off, and permit other employees to initiate the next contact – by requesting to join the departing employee in the competing business. For more on this, see my article, Stealing Employees. Finally, please keep in mind that the law of competition is by its nature fluid and gray. There are few hard and fast rules, and no guarantees can be given on the outcome of any dispute. Moreover, employers and employees become quite emotional about these cases. Even “innocent” parties get dragged in, for example, a company that hires the departing employee likely will be named as a defendant in the case. The costs of litigation (let alone losing in litigation) can get high. So keep this common-sense advice in mind: at all times be sure that you are acting in a decent and fair manner, and well within the boundaries of the law. Remember that, in the final analysis, courts try to protect persons who have acted with decency. This article only gives a short roadmap of issues. There is a lot more to this subject than introduced here. Before you do anything, get competent legal counsel to help you.

Stealing Employees - Can a Former Employee Solicit Away Your Employees?

California law protects the right of employees to change employment, and of competitors to hire one another’s employees. Hence a former employee or a competitor may hire your employees. What they can’t do, however, is steal your employees. This article explains the difference. I also give you some practical measures to protect yourself. EMPLOYEE'S DUTY OF LOYALTY An employee may not solicit your other employees while he is still working for you. While in your employ, the employee owes you a fiduciary duty of loyalty. An employee breaches that duty by soliciting away your other employees to work for a competitor. The key word is “solicit.” The departing employee may not solicit other employees to leave. The departing employee, however, may announce that he is leaving, and other employees may choose to go with him. He may only announce his departure, then back off and wait for other employees to initiate contact and ask if they can go with him. For more on this concept, see my website article, Can a Former Employee Steal Your Customers? PREPARING TO LEAVE Before leaving your employment, the employee may make some preparations to compete, but he still owes you the duty of loyalty. It’s a fine line between preparing for a new gig, and breaching the duty of loyalty. In brief, at some undefined point during his preparations, the employee must either resign or make full disclosure to the employer of his plans for leaving. The undefined point is when the employee is actually harming his employer. In most cases, the employee should resign when he can’t avoid a conflict of interest. WORKFORCE RAIDS California law protects employers from raiding by competitors. An employee or competitor may not take a large proportion of your employees with the intent of driving you out of business. You must prove the employee or competitor had bad intent. Evidence of intent includes emails, texts, and witness testimony about what the bad employee or competitor did or said when soliciting your employees. CONFIDENTIAL INFORMATION The departing employee may not take your trade secrets or confidential information, and a competitor may not hire him to gain access to same. For example, the employee might have access to confidential information about your clients or proprietary technology, and your competitor hires him to get the confidential information. California law prohibits this bad conduct. PROTECT YOURSELF FROM THE DEPARTING EMPLOYEE You can protect yourself from unfair raids on your employees. When an employee announces his intention to leave, you don’t need to let the employee hang around. At that point, the employee is more a liability than an asset. Consider terminating employment so that you can cut off the employee’s easy access to your other employees. Further, by paying salary you just finance his transition to your competitor (although you might have to pay the employee’s salary if you have a contractual notice period for termination). In addition, advise the employee that you’ve retained counsel, and you intend to protect your employees, confidential information and trade secrets. PROTECT YOURSELF FROM NEW HIRES Imagine that you just hired top talent from a competitor. The roles are reversed — now the competitor is looking to sue you for raiding its workforce. All of the above rules apply to you. Be especially careful with the new hire who intends to bring his entire team or group. The new hire might have breached the fiduciary duties we talked about above – he might have solicited the team to go work for you, a competitor. Don’t be complicit in the bad conduct. Instead of targeting the competitor and taking an entire group or office from it, recruit from multiple sources. Certainly don’t talk about how the competitor’s loss of the entire group will cripple it. Further, interview each new hire to be sure that no illegal conduct occurred in their transition, and that no one brings any data from the old job. Have them all sign written representations to this effect. You should talk with an experienced attorney whenever you lose or gain a key employee. Do not go it alone.

bottom of page