Category Archives: Employee Mobility

Legislature Closes a Loophole and Prohibits Out-Of-State Non-Competes in California

Effective January 1, 2017 the new law codified in Labor Code Section 925 prohibits employers from requiring employees who primarily reside and work in California to agree to adjudicate claims against employer somewhere other than California or agree to apply law other than California to their employment disputes. The new law reads:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.

(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.

(d) For purposes of this section, adjudication includes litigation and arbitration.

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.

I have blogged previously on a common practice by out-of-state employers to require California employees to sign non-compete agreements that violate California law. Non-compete agreements are generally prohibited in California. See this blog post. A typical non-compete agreement was presented as a condition of employment or continued employment. It forced employee to agree to not work for employer’s competitors after leaving employer for a number of months or years, often without adequate compensation.

Over the years I counseled many California-based clients who faced a loss of an otherwise desirable job offer or promotion if they refused to sign a non-compete agreement, made “lawful” by the choice of law and forum provision in a State where non-competes were allowed, such as Washington, Florida or Massachusetts. Alternatively, having signed a non-compete, folks were deterred from accepting a new job with an employer’s competitor and moving forward in their career. Employers enforced these agreements with relative impunity by forcing employees to litigate in foreign states, usually using federal court to remove local disputes out of state, where legal costs and unfavorable laws would inevitably work against employees.

By passing the new law California legislature went a long way to stop these practices and ensure that California employees enjoy all of the rights and protections afforded to them by the home state. The new law provides that a contract that violates it is voidable by the employee, unless he or she negotiated the contract through counsel. The new law applies to contracts entered into, altered, modified, renewed, or extended on or after January 1, 2017. This means that many employment agreements, which were entered into prior to January 1, 2017 and contained out-of-state choice of law and forum provisions, will become voidable. The law adds some teeth to enforcement, by entitling employees to reasonable attorney fees and injunctive relief, as well as any other available remedies. By placing control to void an offending contract in the hands of employees and by providing an exception for the assistance of counsel, the law affords employees a stronger bargaining position, should they choose to accept an out-of-state choice of law and forum clause.

When It Comes to Non-Competes, Not All California Employees Are Created Equal

Let’s start with a hypothetical.  You are a California resident, you work in California, and your customers are primarily in California.  Your employment contract provides that after you cease working for your employer, you will not work for any competing business of a similar nature to that of your employer for a period of three years.  You would like to quit and join a competitor of your employer in California.  Can you do that without violating your contract? Is this employment contract legal to begin with?

California is generally known as a “right-to-work” state due to its broad policy against restriction on trade, which is codified in the Business and Professions Code section 16600 et seq.  Subject to select exceptions that do not usually come up in the employment context, section 16600 reads: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  This law gives California its fantastic reputation as a state that espouses lively market competition and a mobile work force available for hire at the drop of a hat.  California courts have long applied section 16600 to invalidate contract clauses seeking to prevent employees from working in their profession post-termination.

Does this mean you can peacefully make a transition to a competitor and ignore the draconian three-year post-termination non-compete clause?  Unfortunately for California employees the answer appears to depend on whether the employer is an out-of-state company and the contract has an out-of-state forum and choice of law selection clause.  Let’s get back to the hypothetical.  It was borrowed from the facts of a case decided in the United States District Court, Northern District of California earlier this year, entitled Meras Engineering, Inc. v CH20, Inc., No. C-11-0389 EMC (N.D. Cal. Jan. 14, 2013.)  In that case, CH20, a Washington corporation, employed several sales individuals in California.  The employees were residents of California, worked for CH20 almost exclusively in California and had no clients in Washington.  In addition to the non-compete provisions, CH20’s contracts contained a forum selection provision requiring that any disputes be litigated exclusively in Washington, applying Washington law.  In contrast to California, Washington allows non-competes as long as they are reasonable.

The employees resigned from CH20 and joined Meras Engineering, a California corporation and a competitor of CH20.  The employees continued to live and work in California.  Meras and the employees sued in a California federal court to invalidate the non-compete clauses in the contracts with CH20 under California law.  CH20 sued in Washington seeking to enforce the non-compete clauses against the employees.  Washington federal court ruled that Washington law must apply to the dispute.  California federal court dismissed the California lawsuit, ruling that the forum selection clause determined that Washington is the jurisdiction in which the lawsuit must be resolved.  The court warned that a “forum selection clause cannot be conflated with choice-of-law analysis,” stating also that as “a general matter, the selection of a forum does not always dictate the choice of law.”1 The court appeared unimpressed that the suit in Washington was going to proceed under Washington law stating that “[w]hile Washington law does not categorically prohibit non-compete clauses as does California law, it does subject such clauses to a reasonableness test.”2, 3

Right or wrong, where does this leave California employees working for out-of-state companies?  When interviewing for a job with a company based elsewhere, read your employment agreements carefully.  Be wary of clauses that dictate that disagreements must be litigated elsewhere and limit where you may or may not work after you leave employment.   If you are interviewing with or thinking of leaving a foreign (non-California) employer, get legal advice before you act to prevent professional and legal hurdles down the line.

  1. 3:11-cv-00389-EMC Document 87 Filed 01/14/13 Page 18: 3, 8-9
  2. 3:11-cv-00389-EMC Document 87 Filed 01/14/13 Page 19: 28, Page 20: 1-2
  3. This finding echoes an earlier decision by a California federal court in Swenson v T-Mobile USA, Inc., 415 F. Supp. 2d 1101 (S.D. Cal. 2006) where the court found that enforcement of the forum selection clause (also in Washington) does not contravene a strong public policy of California against non-competes.

Veronika Short is an Employee Mobility Attorney and the owner of the Law Office of Veronika Short.

Generation Gap in Attitudes toward Confidential Company Files Leaves Young Workers Vulnerable

A 2012 survey conducted by a software company, FileTrek (below), reveals generational gap in employee attitudes toward confidential company documents. A majority (68%) of the Millennial generation (people aged 18-34) believe it is OK to remove confidential files from work, whereas only 50% of people aged 55 plus do. The preferred method? USB stick.

The survey highlights what many will recognize to be a common attitude in the Silicon Valley, namely that “[t]oday’s workforce believes information is an asset to be shared.” (Dale Quayle, CEO of FileTrek) This attitude contributes to the success of Silicon Valley companies. However, in the proprietary information sector, the associated risks may be high for both businesses and employees alike.

For companies, a secure infrastructure and a set of internal policies are extremely important to protect confidential data and to keep income-producing and potentially valuable confidential information under company control. The alternative may mean losing a competitive edge, or losing, period.

For employees, philosophical misunderstandings or “no harm no foul” rationalizations when removing confidential work files may result in termination and exposure to civil liability. At the end of the day, the most secure networks may be compromised if employees do not understand or appreciate the importance of confidential information security and individual consequences. Universities do not prepare young professionals to navigate the pitfalls of a modern workplace when it comes to non-public company information. California occupies a special place in this arena due to the tension between California’s prohibition against restraint on trade (Bus. & Prof. Code §16600, generally known as prohibition against “non-competes”), trade secret law (California Uniform Trade Secret Act, Civ. Code §§3426-3426.11), general contract law and California Labor Code affording employees certain rights, for example §2870 (employee inventions on their own time). Whether they are signing employment agreements for a new job, thinking of transitioning to a competitor or firing up a start-up, stir young people to get advice, understand their responsibilities and rights, and how they fit in the young workers’ worldview.


Why Are Trade Secrets Important When Changing Jobs?

In Silicon Valley, most employment agreements will contain a restriction that employees must keep employer’s trade secret information confidential, even after terminating employment.  This is known as the “trade secret” exception to an otherwise strict mandate by the California legislature against restriction on trade or competition codified in Bus. & Prof. Code §16600 et seq.  In short, subject to several limited exceptions, such as the sale of a business, California employers may not restrict employees from engaging in their profession by having them promise not to work for a competitor after leaving the company as a condition of employment.  However, a former employer may enforce a trade secret clause in the employment contract after employee leaves, for example, to stop the employee from using the former employer’s trade secrets at his new job.  Even though this may appear to restrict the former employee’s ability to practice his profession, the employer does not violate Section 16600 because trade secrets are protected.

Because so much is at stake, disputes arise over what constitutes trade secrets.  Agreements that have overly general language without specifying what should be treated as secret or are not accompanied by a sit-down with the employees to go over the paperwork they are asked to sign, may not give sufficient notice to employees of the types of information they are supposed to treat as trade secret.  Even if the agreements are clear, the information that employer describes may still not be a trade secret under the statutes; it may be not be secret, it may been publicly disseminated, such as on the Internet, it may be generally known in the industry or readily ascertainable by proper means, or it may not derive independent economic value from being secret.  Attorneys evaluate all of these factors and more.

Running afoul of trade secret statutes and employment contracts may expose employees and companies to severe economic consequences in the form of litigation costs, interrupted business opportunities, loss of reputation or timely market advantage, even if the misappropriation occurred unintentionally or through negligent oversight.  Understanding your obligations under the agreements with your employer is an indelible element of a peaceful and economically undisturbed transition to a new job or starting your own business.  For businesses hiring new employees, it is just as important to take reasonable measures to ensure that incoming professionals maintain confidentiality of third party trade secrets and the employer’s.

Contact us if you are facing any of these issues.