Non-Compete & NDA FAQ

California has one of the strongest prohibitions against non-compete agreements in the United States. Business and Professions Code Section 16600 declares that every contract by which anyone is restrained from engaging in a lawful profession, trade, or business is void to that extent. This means traditional non-compete agreements that prohibit employees from working for competitors after leaving employment are unenforceable in California, regardless of how reasonable the restrictions might be.

California courts have consistently refused to adopt the reasonableness analysis used in other states and will not enforce even narrowly tailored non-competes. The prohibition applies to California employees even if their employment agreement specifies another state's law, as California Labor Code Section 925 voids choice-of-law provisions that would deprive California employees of California's protections. Limited exceptions exist for non-competes in connection with the sale of a business under Section 16601 and dissolution of partnerships under Section 16602, where the person restricted has sold their ownership interest.

California significantly strengthened its non-compete prohibitions through two laws effective January 1, 2024. Senate Bill 699 codified that non-compete agreements are unenforceable regardless of where and when the contract was signed, explicitly extending California's protection to employees who signed non-competes in other states before moving to California. Assembly Bill 1076 added Business and Professions Code Section 16600.1, making it unlawful for employers to include non-compete clauses in employment agreements or to require employees to sign non-competes, even if the employer believes the clause is enforceable.

The law requires employers to notify current and former employees in writing by February 14, 2024, that any non-compete clauses they previously signed are void. Violations can result in civil penalties and make employers liable for attorney fees and costs. Employers who include void non-compete provisions may face unfair competition claims under Business and Professions Code Section 17200. These laws further cement California's position as the state most protective of employee mobility and competition.

Unlike non-compete agreements, non-disclosure agreements (NDAs) and confidentiality agreements are generally enforceable in California when properly drafted to protect legitimate business interests. California recognizes that businesses have protectable interests in trade secrets, confidential business information, and proprietary data. The California Uniform Trade Secrets Act (Civil Code Sections 3426-3426.11) specifically authorizes injunctions against actual or threatened misappropriation of trade secrets, making NDAs an important enforcement tool.

However, NDAs must be carefully crafted to avoid functioning as disguised non-competes. Overly broad NDAs that effectively prevent employees from using general skills and knowledge in their field may be deemed unenforceable restraints on trade. NDAs should specifically identify categories of confidential information, explain why the information is confidential, and include reasonable time limitations. California courts will not enforce NDAs that restrict employees from discussing wages, working conditions, or potential legal violations, as public policy protections override contractual restrictions in these areas.

California Civil Code Section 3426.1 defines a trade secret as information that derives independent economic value from not being generally known or readily ascertainable by proper means, and is subject to reasonable efforts to maintain its secrecy. Trade secrets can include formulas, patterns, compilations, programs, devices, methods, techniques, or processes. Customer lists may qualify if they contain confidential information about customer preferences, pricing, or contacts not publicly available. Technical specifications, manufacturing processes, and proprietary software code commonly qualify.

Marketing strategies, business plans, and financial data may also constitute trade secrets. The key requirements are that the information provides competitive advantage because it is secret, and the owner takes reasonable steps to protect confidentiality. Reasonable measures include limiting access to those with business need, using confidentiality agreements, marking documents as confidential, securing physical and electronic access, and implementing exit procedures for departing employees. Information that becomes publicly known or is independently developed by others loses trade secret protection.

The California Uniform Trade Secrets Act provides comprehensive remedies for trade secret misappropriation under Civil Code Section 3426.3. Injunctive relief is available to prevent actual or threatened misappropriation, including orders prohibiting disclosure or use of the trade secret. Injunctions may continue for as long as necessary to eliminate commercial advantage from misappropriation, but courts balance protection against undue hardship on the defendant.

Damages can include actual losses caused by misappropriation and unjust enrichment not captured in actual loss calculations. When neither measure is adequate, damages may be measured by a reasonable royalty for unauthorized use. If willful and malicious misappropriation is proven, courts may award exemplary damages up to twice the compensatory damages award. Prevailing plaintiffs may recover attorney fees if misappropriation was willful and malicious, and prevailing defendants may recover fees if the claim was made in bad faith. The statute of limitations is three years from when misappropriation was or should have been discovered under Section 3426.6. Businesses should act promptly upon discovering misappropriation to preserve their remedies.

California courts have largely invalidated non-solicitation agreements under the same Business and Professions Code Section 16600 principles that void non-compete agreements. In Edwards v. Arthur Andersen LLP (2008), the California Supreme Court reinforced that Section 16600 should be interpreted broadly to protect employee mobility. Subsequent cases have found that customer non-solicitation clauses restrain trade by limiting an employee's ability to pursue their profession using relationships developed through their own efforts.

Employee non-solicitation clauses preventing recruitment of former coworkers face similar scrutiny and are generally unenforceable when they broadly restrict contact. However, employers can still protect trade secrets, including confidential customer information that qualifies as a trade secret. Employers may also have enforceable claims for tortious interference if a former employee uses improper means to solicit customers or employees, such as making false statements or breaching fiduciary duties. The key distinction is between restricting natural competition versus misuse of truly confidential information or improper conduct.

California Business and Professions Code provides three narrow statutory exceptions to the general non-compete prohibition. Section 16601 permits non-compete agreements in connection with the sale of a business, including goodwill, ownership interest, or operating assets, allowing the buyer to restrict the seller from competing within a specified geographic area for a reasonable time. Section 16602 allows partners to agree not to compete upon dissolution or dissociation from a partnership within a specified geographic area where the partnership conducts business.

Section 16602.5 extends similar provisions to members of limited liability companies upon dissolution or termination of membership. These exceptions recognize that buyers of businesses and remaining business partners have legitimate interests in protecting the goodwill they purchased or retained. The restrictions must be reasonable in geographic scope, typically limited to areas where the business actually operates. Even within these exceptions, courts require the restrictions to be reasonably necessary to protect the buyer's interests and may refuse to enforce overbroad provisions.

California courts apply California law to non-compete disputes involving California employees, even when employment agreements specify another state's law. Labor Code Section 925, effective since 2017, makes void any provision in an employment agreement that requires California employees to adjudicate claims outside California or deprives them of California law protections. The California Supreme Court in Application Group Inc. v. Hunter Group Inc. (1998) held that California's interest in protecting its workers' mobility outweighs other states' interests in enforcing their non-compete laws.

California courts have also refused to enforce non-competes under the equitable doctrine of comity when doing so would violate California's fundamental public policy. This means an employee who moves to California from a state where non-competes are enforceable likely cannot be restrained from competing while working in California. However, California courts may consider another state's law if the employee only briefly worked in California or primarily performed services elsewhere. Employers attempting to circumvent California law by requiring out-of-state employment or litigation face substantial legal risk.

An enforceable California NDA should precisely define what constitutes confidential information, avoiding catch-all language that could encompass general knowledge and skills. The definition should identify specific categories such as customer data, pricing information, technical specifications, or business strategies. The NDA should explain why the information is confidential and has economic value from its secrecy. Include clear obligations specifying how the recipient must handle confidential information, including restrictions on disclosure, requirements for secure storage, and limitations on copying.

Specify the permitted uses of the information, typically limited to the business purpose for which it was disclosed. Include reasonable duration limits; perpetual NDAs may be appropriate for trade secrets but not general business information. Identify exceptions for information that becomes public, was independently developed, was rightfully obtained from other sources, or must be disclosed by law. Include return and destruction provisions for when the relationship ends. The agreement should not restrict discussions of wages, working conditions, or potential legal violations. Consider including mutual confidentiality obligations if both parties will share sensitive information.

Employees asked to sign non-compete agreements in California have several considerations and options under Business and Professions Code Section 16600 and related laws. First, understand that most non-compete provisions are void and unenforceable in California regardless of what you sign, providing some protection even if you do sign. However, under the 2024 law changes, employers violate California law simply by asking employees to sign non-competes, potentially giving you grounds to report the violation.

Before signing any employment agreement, carefully review all restrictive provisions including non-disclosure, non-solicitation, and intellectual property assignment clauses, which may have different enforceability standards. Consider negotiating to remove or narrow any overly broad restrictions. Document any verbal assurances that restrictive provisions will not be enforced. If you are a current employee who previously signed a non-compete, your employer should have notified you by February 14, 2024, that the provision is void. If you did not receive such notice, consider requesting written confirmation. Consulting with an employment attorney can help you understand your rights and options before signing or if you face threats of enforcement.