Using a California Employment Contract to Achieve Non-compete Goals
It is well-known that non-compete agreements in California are unenforceable outside of a couple of limited circumstances. However, a well-drafted California employment agreement can accomplish many of the goals that businesses seek to achieve with a non-compete agreement.
Most California businesses want non-compete agreements because departing employees may be starting new businesses or new employment using the trade secrets and confidential information of their former employer. The departing employees will say otherwise, deny that they will, and maybe even actually believe they will not be using the trade secrets of the old business. But they will and that is the unfair marketplace competition that non-compete agreements are designed to prevent.
However, strong California employment contract provisions with respect to confidentiality, duty of loyalty, and trade secrets can get close to what a non-compete agreement is supposed to accomplish.
Duty of Loyalty: Specify What is Required and What is Prohibited
In California, every employee owes a duty of loyalty to his or her employer. This means that employees, particularly managerial employees, must use their best efforts on behalf of employer, must not divert business opportunities to themselves or others, and must not act to the benefit of another employer.
This duty of loyalty should be expressly included in the employment agreement. This creates breach of contract causes of action and, most importantly, allows the employer to expand, enhance, and delineate the duty. Along with stating the duty of loyalty generally, the employment agreement can enhance the duty when the employee is planning to leave and start or join a competing business. The agreement should specifically prohibit behavior including:
- Diverting a business opportunity;
- Delaying a business opportunity and then diverting after separation from the company;
- Opening financial accounts prior to separation;
- Forming corporate entities prior to separation;
- Meeting with customers or fellow employees — at all;
- Seeking office, retail, or workspace prior to separation; and
- Posting “for hire” advertisements prior to separation.
Extend the Duty of Loyalty Beyond Separation
With certain practices, the California employment contract can attempt to extend the duty of loyalty beyond the date when the employee separates from the company. With respect to customers, clients, and current employees, for example, prohibit knowing contact with same for commercial purposes for two years after separation. Pro-tip: This might not work, so be sure you have a severability clause.
Prohibit Use of Trade Secrets
California law already prohibits misappropriation and unauthorized use of a trade secret. However, making those prohibitions explicit in the employment contract is still necessary to establish the existence of the trade secrets to be protected.
Actually Protect Your Trade Secrets: Customer Lists
For information to qualify as a “trade secret,” a business must take active steps to protect the confidentiality of the information. Thus, steps should be taken with client lists and contact information such as marking files and lists with a “CONFIDENTIAL” stamp, etc. In your employment contracts, expressly list customer and client information as a “trade secret,” and expressly require the employee to mark such as CONFIDENTIAL and to keep it secret.
Prohibit Use of Retained-Memory Trade Secrets
Employees mistakenly believe that, if they are just remembering some customer name or unique process, that is not misappropriation of a trade secret. Deal with that problem in your employment contract. Use language like:
“Misappropriation” shall not be limited to a physical taking or electronic transfer of confidential information but shall include confidential information retained in the Employee’s memory. Use or disclosure of such retained-memory information shall constitute misappropriation of the Company’s Trade Secret.”
Use as Many Pro-Employer Provisions as Possible
It may be harsh, but you want your employment contract to protect your company like a guard dog. As such, you want as many “pro-employer” provisions as possible including:
- Attorneys’ fees recoverable by the company if they prevail in any lawsuit; but not for the employee;
- Liquidated damage clauses;
- Injunctive relief;
- Employee indemnity provisions;
- Jury trial waivers (where allowed); and
- Choice of venue favorable to the company.
Be Prepared with an Aggressive Litigation Strategy
The goal of these and similar contractual provisions is to put your departing employee at a “zero-point” when he or she is creating or joining a competing business. He or she should not have a “head start” by using your company’s clients, processes or methods. To ensure this goal is achieved, you and your company must be prepared with an aggressive litigation strategy. Any hint that the employee has breached his or her employment contract should bring swift legal action. And be prepared to litigate against the new employer for indirect trade secret misappropriation and/or unfair business practices. See Cal. Civ. Code § 3426; Cal.
Contact San Diego Corporate Law Today
If you would like more information about California employment contracts, contact attorney Michael J. Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has extensive experience in drafting employment contracts and the other contracts and agreements necessary for running your business. Mr. Leonard can be reached by email or by calling (858) 483-9200.