THE CURRENT STATUS OF NONCOMPETE AGREEMENTS
 

For those businesses and corporations intrigued by the attractiveness of noncompete clauses used in employment agreements, recent developments may cause you to think again. Under California law, a noncompete 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. Noncompete 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 noncompete 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 noncompete 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 noncompete agreement. The employer claimed that it could not be held liable because the noncompete clause was unenforceable anyway. The California Court of Appeals found the employer liable stating the ineffectiveness of the noncompete clause is not apparent to employees.

Therefore, in states where noncompete 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 noncompete clause. In order to protect their interest, employers can only now draft their agreements to prevent the disclosure of trade secrets.