Using Restrictive Covenants in California

Companies across the U.S. routinely use restrictive covenants in order to protect their legitimate business interests. A restrictive covenant—sometimes called a “negative covenant”—is an agreement where at least one party agrees to abstain from certain actions. The two most common restrictive covenants used in employment law are: 

  • Non-Compete Agreements: This contract is used by employers to prohibit employees from either starting a business in direct competition with the employer or taking a job with an existing direct competitor. These agreements must be reasonable in scope, duration, and geographic area. 
  • Non-Disclosure Agreements: NDAs, as they are often called, are used to prevent one or more parties to the contract from divulging sensitive information. Companies often use NDAs to protect trade secrets. 

California is one of several states, however, that completely bans non-compete agreements. State law essentially prohibits courts from finding these agreements to be enforceable. In fact, courts have often ruled that employees who entered into a valid non-compete agreement in another state are no longer subject to the agreement if they subsequently relocate to California. Similarly, California employers are not allowed to have a choice-of-law provision that would allow them to enforce their non-compete agreements elsewhere in order to circumvent this rule. 

Non-Disclosure Agreements Are Enforceable in California

A non-disclosure agreement is a restrictive covenant that actually is valid and enforceable in California. NDAs received a fair amount of publicity in the midst of the #MeToo movement, as many women (and some men) who settled sexual harassment claims were prohibited from speaking out against their abusers. In the employment law context, though, non-disclosure agreements are used to protect trade secrets and other proprietary information that is not known to the general public. This can include client information, unique processes and systems, or technology prototypes. 

Overly broad non-disclosure agreements will not hold up in a California court, though. Required components of an NDA in California include: 

  • A statement describing the purpose of the NDA; 
  • The time period to which the employee is subject to the NDA; 
  • A description of the information not to be disclosed; 
  • A statement designating the rightful owner of the confidential information; 
  • Actions the employee must take (or not take) to protect the confidential information; and
  • An item describing the recourse available to the employer if the employee violates the NDA. 

If you’re an entrepreneur in California, you may have sensitive information you need to protect in order to grow your business successfully. If you think you might need to restrictive covenants to help keep your company’s assets secure, contact IGC. We’d love to help.

Integrated General Counsel
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