California law limits how employers may restrict competition

In the United States and beyond, competition among businesses is prized as a critical force that drives progress and benefits consumers. As a result of that deeply held value, the American legal system is generally intolerant of attempts to limit competition on a large or small scale.

This is particularly true in California, where the laws regarding non-compete agreements are unusually strict, and nearly all such agreements are considered invalid. Under state law, only equity stakeholders in a company can be bound by non-compete agreements. The consequences of the state's favorable policy toward business competition can perhaps be most acutely observed in Silicon Valley, where the quickly evolving tech industry is fueled by a highly skilled and highly mobile workforce.

Non-disclosure agreements in California

Although California law limits the use of non-compete agreements, many businesses still have a need to safeguard their investments and prevent workers from taking confidential information with them when they leave the company. Often, this is accomplished through a different type of employment contract called a non-disclosure agreement, which is also called a confidentiality agreement.

Whereas a non-compete agreement explicitly limits where an individual may work, a confidentiality agreement merely restricts what information he or she may share with other parties. Thus, a non-disclosure agreement can be used to prevent an employee, contractor or other individual from disclosing confidential information obtained through the company, such as:

  • Trade secrets
  • Recipes and formulas
  • Inventions and prototypes
  • Client lists
  • Business strategy
  • Manufacturing processes

Because a non-disclosure agreement does less to restrict an individual's future employment and business prospects than a non-compete agreement, it is more likely to be enforceable under California law. However, while the California courts take a more favorable view of non-disclosure agreements, there still are limits to what they may entail.

In order to be enforced by the courts, a non-disclosure must be clear and specific regarding the scope and nature of the protected information, and it must be supported by a legitimate business need. It must also clearly differentiate between confidential and non-confidential information. In other words, a confidentiality agreement may not simply place a blanket restriction on any and all disclosures by the individual, though it is not uncommon for companies to attempt to do so. An overly broad non-disclosure agreement may be invalidated if it is challenged in court.

Get legal advice before you sign

Before signing a non-disclosure agreement or any other type of employment contract, it is important to get advice from an attorney with a background in matters of California employment law to make sure your rights and interests are well protected. Contact Kastner Kim LLP to arrange a personalized consultation.