Non-Compete Agreements: Going, Going, Gone

By John Hollon

Aug. 7, 2008

You know that a lot of workforce trends start in California and the West Coast in general, but the Golden State is also a place where a lot of workforce law gets focused and refined.  Here is the latest one, and it pretty much drives a stake through a legal issue that drives a lot of people crazy–noncompete agreements.

As the San Francisco Chronicle reports on Thursday, August 7, “California employers can’t limit their employees’ right to work for a competitor or solicit former clients after they leave the company, the state Supreme Court ruled today. In a unanimous decision, the justices said state law since 1872 has forbidden so-called noncompete clauses that restrict management employees’ options in their next job or business.”

The reason this is important, as the Chronicle points out, is because “Courts in some states have upheld [noncompete] restrictions, and the federal appeals court in San Francisco has interpreted California’s law to allow a company to limit its employees’ future job choices as long as it doesn’t prohibit the employee from working in the same field. But the state’s high court said any such restriction conflicts with California’s ‘legislative policy in favor of open competition and employee mobility.’ ”

In other words, California’s highest court says that allowing workers the mobility to seek new jobs and openly compete on the free market trumps, in most all cases, the ability of an employer to restrict a worker from going to work for a competitor.

The Chronicle quoted Justice Ming Chin, who said, “An employer cannot by contract restrain a former employee from engaging in his or her profession, trade or business.” According to the justice, “the law recognizes only a few limited exceptions, for noncompete agreements that are part of the breakup of a corporation or partnership.”

If you’re wondering why this is important, the Chronicle explains:  “Businesses and employment lawyers have been following the case closely, anticipating that it would resolve the disagreement between state and federal courts on the meaning of the California law. Federal courts are likely to fall in line now that California’s highest court has interpreted the law.” And if the federal courts follow California’s lead, this ruling will quickly spread across the country and be applicable to every workplace in every state.

“Both California employers and employees are winners in this case,” said attorneys James Pooley and David Murphy, partners in the trade secrets and unfair competition litigation practice at Morrison & Foerster.  “The court’s decision was correct both as a matter of law and public policy. California will continue to have a high-velocity labor market, with the type of high employee mobility that many economists and social scientists believe has fueled its high level of technological innovation.”

To put that in non-attorney English, the court’s decision is good for both workers and the businesses that employ them because it removes a barrier limiting the ability of workers to freely move in the labor market–a restriction that might limit future innovation and job growth in California’s large and ever-changing economy.

Here’s my take: I’ve always thought that noncompete agreements were the province of paranoid, small-minded executives. I worked for at least one who has to be frothing at the mouth over this. He loved to bully workers and threaten them about taking his “trade secrets” to someone else.

His problem, however, was that he had nothing worth taking. There was no secret sauce, no combination of 11 herbs and spices for workers to take across the street. He had nothing to lose then, and with this California Supreme Court ruling, one fewer thing to bully his workers about now.

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