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Diary of an Adman

Excerpt #1

Friday, October 25, 2002

There’s something I’ve been meaning to write about and, in light of certain bits of information that have recently made their way to me, I figured today was the day to address it.

Consider it the "dirty little secret" of many California employers: "The Non-compete Clause." What’s that? Basically, it’s a contract provision that would, if enforceable, prohibit an employee from leaving one employer to go to work for a competitor or starting his/her own business that is similar to the former employer's. Sound ridiculous? Well, it is. And that’s why, while non-compete clauses may be a standard feature of employment contracts in many states, they're banned under California law. (And recent legal developments see them dying in other states now as well.)

I’ll show it to you spelled out in even greater detail. (So you won’t worry should the time come that you want to leave your place of employ to create your own firm, work at another firm, approach former clients on your own, etc.) Straight from the lawyer’s mouth, here’s the deal:

"For those businesses and corporations intrigued by the attractiveness of non-compete clauses used in employment agreements, recent developments may cause you to think again. Under California law, a non-compete clause in an employment agreement is unenforceable and can not be used to prevent an employee from seeking work elsewhere in the same field or with competitors. Non-compete agreements will only be upheld when the sale of a business is involved and the agreement is used to prevent the seller/competitor from opening up the same business within a reasonable distance from the prior one.

Having knowledge that non-compete clauses are unenforceable, some organizations have workers sign these agreements anyway as a "scare" tactic to prevent the employee from seeking work with the competition. However, a California case has recently brought to light that the use of these non-compete clauses as "scare" tactics will not be tolerated. In D’Sa vs. Playhut Inc., an employee sued his employer when he was fired for refusing to sign a non-compete agreement. The employer claimed that it could not be held liable because the non-compete clause was unenforceable anyway. The California Court of Appeals found the employer liable stating the ineffectiveness of the non-compete clause is not apparent to employees.

Therefore, in states where non-compete clauses are unenforceable, like California, employers should refrain from including these clauses in their agreements as they may be liable for damages incurred by the employee in reliance on this non-compete clause. In order to protect their interest, employers can only now draft their agreements to prevent the disclosure of trade secrets."

Got it?

Here’s one last official take:
California's Business and Professions Code 16600 provides, "Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Despite continuing attempts to challenge the validity of that 1872 statute, California courts have held fast. Non-compete clauses are not enforceable in California, even if the contract provides that another state's law is to be used in any interpretation of the contract.

Regardless of all this obvious information, some employers know, but don't care, that their non-compete agreements are not enforceable, in whole or part. They might try to get you to sign on the dotted line anyway. Just remember, it's an intimidation tactic to protect that for which they have no right to protect. They count on employees not knowing or checking its legality. If you don't sign it, they might terminate or refuse to hire you, or deprive you of some benefit or perk. But you could have legal recourse if this happens to you.

I read an excellent quote recently from Douglas Towns, an Atlanta-based employment law expert, on how many employers take advantage of workers by misrepresenting these non-compete agreements. "Employers will seek to push the envelope for deterrent effect," Towns says. "Business ethics don't really get involved here."


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