Can They Make Me Sign A Non-Compete Clause?

David Graulich Posted by David Graulich.

David Graulich is president and founder of Maxfield Public Relations, a communications consulting firm based near San Francisco.


Wronged at Work! CAN THEY MAKE ME SIGN A NON-COMPETE CLAUSE? By David Graulich, Esq.

Wronged at Work!

CAN THEY MAKE ME SIGN A NON-COMPETE CLAUSE?

By David Graulich, Esq.

I received an email a few weeks ago from a reader I’ll call Larry (not his real name):

Dear Wronged at Work: I am a salesman at [a local company]. I just gave two-weeks notice to my boss that I taking a sales job at another company. My boss is asking me to sign a non-compete clause before I go. Is a non-compete clause legal in California? Should I sign? Thank you in advance.  — Larry

There’s an unusual aspect here. Larry’s boss is asking him to sign the non-compete clause when Larry is leaving; most employees are confronted with these clauses when they are hired.  Larry’s boss has no leverage if Larry refuses. What’s he going to do – fire Larry?

Most of the time, non-compete clauses (also known as covenants) are encountered in the thick stack of papers from Human Resources when you show up for your first day of work. This is the pistol-to-the-head scenario: if I don’t sign, do I lose the job? Or does refusing to sign make me PNG (persona non grata)?

The good news for Larry – and for every working person in California – is this:

Employee non-compete clauses are void in California and cannot be enforced. The applicable statute is Business & Professions Code Section 16600. In keeping with California’s history as a place for risk-takers and fresh starts, the statute prohibiting non-compete clauses has been on the state’s books, in one form or another, since 1871.

Economists credit California’s strong policy against non-compete clauses with spurring the expansion of California’s high-technology industries. Most other states impose “reasonableness” standards, based on length of time and geography, that permit restrictions on ex-employees. California has spawned hundreds of spinoffs staffed with talent from such corporate “Mother Ships” as Hewlett-Packard, Lockheed and Genentech.  Massachusetts, which has a high-tech sector but which limits the job mobility of employees, has created relatively few spin-off companies compared to California.

Note that California’s policy applies to the employer-employee relationship. The rules are different if the situation involves a business owner who is selling a business. An acquirer can enforce a non-compete clause against the departing owner. This protects the good will of a business after a change of ownership, and prevents the seller from diminishing the value of the business that has just been purchased.

A company also has a right to protect its trade secrets. This is really a different legal issue, one that pertains to the commercial value of intellectual property, such as patents and proprietary information. In other words, you can compete like crazy against your former employer, but you cannot make off with trade secrets in order to do so. Customer lists are the subject of much bitter litigation. These lists may or may not qualify as trade secrets, depending on what data is contained with them, whether that data is generic or proprietary, and how the former employee uses the data.

Let’s get back to Larry. Assume Larry is starting his job and the employer insists that he sign a non-compete clause. Larry refuses and the employer fires him. Is this wrongful termination in California?

The answer is yes, based on D’Sa v Playhut (2000).  Playhut, a toy designer and manufacturer, presented Richard D’Sa with a document that contained a non-compete clause. Mr. D’Sa objected to the non-compete clause because such clauses are void in California. The employer insisted. When Mr. D’Sa again refused, he was fired.

Surprisingly, Mr. D’sa lost at trial.  The appellate court saw the law more clearly, thank goodness, and reversed the trial decision so that the winner was Mr. D’Sa.

“The issue is whether defendants can make plaintiff’s acceptance of the agreement a condition of his continued employment by firing him when he refused to sign it. We hold they cannot,” the Court declared, in a ringing victory for California workers.  “California law would protect plaintiff if defendants sought to overreach by trying enforce the covenant not to compete, and California law will also protect him from a termination of his employment brought on by his refusal to sign an agreement containing the illegal covenant.”

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David Graulich, Esq. is an employment lawyer who represents people who have been wronged at work. He helps clients with problems such as discrimination, harassment, and wrongful termination. David welcomes questions and comments about Wronged at Work! Contact him at [email protected] or (916) 966-9600. Disclaimer: This column is not intended, and should not be construed, as an offer of legal advice. Consult a qualified licensed attorney for counsel on a specific legal problem.