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Understanding California law concerning restrictive covenants

Just as contracts serve as the backbone of business transactions, many companies rely on employment contracts to mitigate risk, as well as protect their proprietary information and overall business interests. Drafting an effective contract to mitigate risk requires thorough legal analysis of the issues and clear, precise language to help avoid future misunderstandings related to the obligations and duties involved in the contract.

Employment contracts can be complex, including a wide variety of subject matter. Restrictive covenants embedded in an employment contract can serve to protect business interests in a highly mobile employment market. However, with the wide range of information from other states available on the internet, many individuals and businesses may be confused about what California courts will enforce and what types of contractual obligations California law prohibits – especially in regard to restrictive covenants.

What are some common forms of restrictive covenants?

Protecting proprietary information, client lists, trade secrets and confidential information through a nondisclosure agreement, or confidentiality agreement, can be strong medicine during the existence of the employment arrangement and after a worker has left the company in the competitive marketplace. California law allows businesses to protect its trade secrets through a properly drafted nondisclosure agreement. While these restrictive covenants are generally enforceable, businesses must understand that merely defining information as a trade secret in the contract may not hold up in court.

Understanding nondisclosure agreements is California

Disputes may arise on whether the information is actually a trade secret or proprietary information. The contractual language must include clear enough language to place the employee on notice that vital information cannot be shared with other parties, without being so vague as to allow general information to fall within the scope of the language for future expansion.

Noncompete agreements are void under California law

Nondisclosure agreements differ significantly from noncompete agreements. California is one of a small number of states that do not recognize noncompete clauses as valid. California law finds that noncompete agreements are not appropriate for public policy reasons and the California Business and Professions Code expressly prohibits enforcement of noncompetes in California courts. Moreover, businesses have been held accountable for wrongful termination for firing workers who have refused to enter into noncompete agreements, according to the American Bar Association.

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