Non-Competition Clauses are Illegal

It is seems simple. You own a business that provides a service to customers. You have employees that provide that service. You don’t want your employees to steal your customers. So, you have your employees sign a non-competition agreement when they come to work for you. Your employees agree not to do any work for your customers for a year after they leave your employ.

Or, you are in a fiercely competitive industry. You don’t want your employees to take your business methods, customer lists and knowledge of your business practices and go to work with a competitor. So, you have your employees sign a non-competition agreement in which they agree not to work for your competitors for a year after they leave your employment - and, just to be reasonable, you limit this restriction just to the county in which you are located.

These agreements seem reasonable to you the business owner. You found the form for the agreement you have your employees sign on the Internet or on CD of business forms you bought at an office supply store. You signed such agreements yourself in the past when you worked for others. You know they are commonplace in the business world.

Those agreements are illegal in California. Years ago, the State of California adopted a very strong policy against non-competition agreements for individuals. The California Business and Professions Code states that agreements that restrict the ability of an individual earn a living by lawful means are void. That means that the agreements in the examples I wrote above were void as soon as the employees signed them.

California courts and Federal courts in California have strongly upheld this policy. Whether the employer is a sole proprietor or a Fortune 100 corporation, the courts have consistently refused uphold or enforce non-competition agreements. Even when the employer and the employee were out of state when the agreement was signed, and the agreement was legal in the state in which it was signed, the agreement could not be enforced once the employee entered California.

A non-compete agreement, or a clause in an employment agreement, could also be construed as unfair labor practice or an unfair business practice.

What can you do then about employees either taking customers away from you or using your business practices against you? In California, you can not restrict the ability of someone to make a living but you can protect your trade secrets.

Trade secrets include business practices and methods, formulas, manufacturing processes, business plans and strategies, computer programs and customer lists. It is illegal to use a business’ trade secrets that were improperly acquired. An employer can prevent an employee from using trade secrets after an employee stops working for the employer. In that context, the law recognizes that customer lists are trade secrets and that an employee can take steps to protect its customers and its other trade secrets.

California has made a narrow exception to its anti-non-competition policy for trade secrets. In order to protect its customer lists, an employer can require an employee to agree to not solicit the employer’s customers for a reasonable time after leaving the employment of the employer. (Reasonable time should be read to mean short such as a year or less).

An employer can have an employee sign a non-disclosure agreement (NDA). NDAs are agreements in which a person, either an individual or a company, agrees to not disclose confidential information, including trade secrets, of a business. NDAs are used in a variety of occasions, such as when one business in negotiating the purchase of another business.

I often recommend to my clients that they have their employees sign NDAs that list those areas of their business practices that are sensitive and are considered trade secrets.

Another exception to the anti-non-competition policy is the sale of a business ownership interest. If an individual is a principal in a business (e.g. an owner, partner, or major shareholder) and that individual sells his or her interest in the business, then, as a part of that sale, the selling individual can agree to not compete in the same industry for a reasonable time within a reasonable geographic distance. (For example, one year in the same county).

Other than the trade secret and the ownership sale exceptions, non-competition agreements are illegal in California. However, employers can take steps to protect their customer lists and business methods if they are wise about how they approach them.

Legal Boiler Plate Is Important

Commercial contracts have standard clauses regarding such matters as venue for legal disputes, the state law governing the contract, and odd clauses such as integration clauses that do not seem important at the time that the contract is being signed.

For consumers, such standard clauses are often unenforceable since the parties don't have equal bargaining power.

Not so in commercial contracts. The courts will enforce them even if they seem very unfair. Many business owners have contempt for such clauses and refer to them as boiler plate. However, such standard clauses can be critical.

If you get into a dispute with the other party, you may have to litigate that dispute in a county or state that may make it difficult or even impossible to successfully resolve the dispute. Many standard clauses are also are critical in interpreting the relationships between the parties.

The clause that states that the contract contains the entire agreement between the parties means that no other agreements or negotiations between the parties can be introduced to show the parties' intentions. That can be very harmful if two companies enter into a series of related transactions. The point is that business owners must pay attention to these clauses when they enter into commercial contracts.

The courts hold businesses to these clauses in commercial contracts and they can be very destructive. They can also be very helpful. In the video portion of this blog entry, I mention the case of City of Hope vs. Genetech. This was a very complex case in which the defendant Genetech was sued for several things having to do with patent licenses and contracts between the parties. The City of Hope obtained a huge damage award at trial including punitive damages for breach of fiduciary duty.

On appeal, the punitive damages were struck down on the grounds that the standard clause of the parties contract contained a clause that stated that the parties did not intend to create a joint venture, partnership or similar relationship between them. The court held that that clause showed that the parties did not intend to create a fiduciary relationship between them. Genetech was saved by boiler plate from having to pay millions in damages.

Don't say boiler plate isn't important.

Desperate Times Means Beware of Desperate Lawyers

The old saying goes "Desperate Times Means Desperate Measures". Unfortunately, many people are currently desperate, for work, for cash flow, etc.

I have increasingly heard more and more stories of individuals who have been victimized by desperate professionals or trades people. Auto owners are sold service that they don't need. Contractors under-bid projects and leave them unfinished. Mortgage lenders and real estate agents outright lying to homeowners.

And attorneys. Attorneys who take on cases that they can't handle, or should not take. Attorneys who over bill their clients, or over-promise what the attorney can deliver.

I hate to say it but individual consumers and business owners must be careful these days when they retain an attorney. I saw an excellent article today that can help in this matter. The article urged attorneys to provide a Risk Benefit Analysis prior to any litigation matter. Such an analysis weighs the benefits of the litigation with the risks and costs. I thought this was an excellent idea and it got me thinking about what consumers and business owners should look for in an attorney in these days.

I suggest the following in evaluating an attorney:

1. Expertise. This includes experience but also how much of the attorney's practice is devoted this type of matter. Is the attorney well versed in this area of law or just taking on your matter to make some fees.

2. Compare. Independently review the qualifications of a few attorneys.

3. Risk/Cost - Benefit. Prior to any litigation ask the attorney to give you an analysis, in writing, of the benefits, risks and costs of the matter. They should be very frank and you should not be too happy with the attorney's assessment if the attorney is honest with you.

4. No flattery. Do not retain an attorney who continually tells you what you want to hear. Attorneys are in the business of bringing their clients down to earth as to what can and not be accomplished. No attorney should continually tell you that are completely right, that you can get everything you want, etc. If that is the case, do not hire that lawyer.


5. Insist on communication. Insist that the attorney communicate with you about every step of the legal process, particularly for litigation matters. Insist that the attorney inform you of approximately how much you will be billed as the matter progesses.

6. Get a budget. Ask for a budget from the attorney. Insist that if it appears that something might cost more than the budgeted amount that you be contacted first and give your authorization. Get that in writing.

Generally, speaking be careful about the attorneys you retain and insist that you be kept informed about risks, benefits and fees throughout the time that they work for you.

Follow Up!

A consistent problem that I have seen in my career is the classic "failure to communicate". Two parties will negotiate by phone or in person the deal points of a transaction, but never follow up that conversation with a written communication as to what was discussed.

I most often see this in litigation after two parties think that they have agreed to something and, later, discover that their understanding of what was agreed to was completely different. A salesperson and a customer will discuss pricing and timing of a sale and later discover that they are incomplete disagreement over the terms. This is a prime cause of lawsuits.

To avoid these problems, always follow up any business conversation with a written message that completely states the deal terms discussed. In this way, a permanent record is made of the things discussed and the parties avoid disagreements. Business owners and their employees and sales representatives that routinely send written follow up communications have a huge advantage in negotiations and dispute resolution.

Here are a few hints.

1. Write the message as soon as possible after the conversation. The sooner you write about a discussion, the more accurate you will be.

2. Use plain English. Write simply and clearly. Do not use slang, trade terms (unless necessary), acronyms and other terms that everyone might not understand.

3. Be complete. Write out all the terms that you discussed. Avoid using "etc." or referencing the conversation that you had without writing out the things you discussed. This may seem like a pain, but it is important to be complete.

4. Use email or a letter. The more permanent the method of communication, the better. Email is good, but make sure that it can be found. Save the emails in a place that can be recovered easily later. The good thing about emails is that the several replies between two parties can create a good record. The best method is a letter sent by fax. A fax machine can give an immediate confirmation of receipt. Plus a written letter has a greater impact. Avoid text messaging. Text messages are easy to delete and are more difficult to download into a format reviewed. There is also a greater tendency towards using shortened terms and to be incomplete in text messages.

5. Leave open the possibility for disagreement. End the communication with a phrase that states something like "If you disagree with what I have written here, please inform me." If the other side does not reply, then you can assume that they agree. They will be more likely to reply if they disagree and it is important that they communicate any disagreements.

I have seen many instances when one party to a lawsuit had consistently followed up in writing as the parties negotiated the transaction in dispute. The side that followed up consistently, clearly and completely was in a much stronger position. More importantly, companies that consistently send written follow up communications do not have disputes with their customers and vendors. They stay out of court which is the best position to be in.

Protect Against Hardball Trademark Tactics

I have noticed in recent years that business are increasingly unscrupulous about stealing the ideas of other businesses. This is particularly true in the area of trademarks and trade names. I have seen increasing cases in which rival business owners will file domain name registrations and trademark applications in an attempt to steal or preempt the legitimate use of a name by other business owners in the same industry.

I had case in which my client started a small recording company. My client incorporated the business and launched a website. After a few years and a producing a few CDs, she found out that someone had filed a trademark application for the same name. The person filing the trademark application was not using the name and apparently only filed the application to hold the name hostage. When I contacted the attorney for the person filing the application, his attorney informed me that his client would give up his application for money.

Another form of hardball tactics is filing domain name registrations that are similar to one already in use. This is done by registering the same name as .org, .net, or .biz, or using a hyphen in the name.

Of course, one can file lawsuits to remedy these situations but that is very expensive.

I encourage my clients to protect their business names and logos as quickly as possible. File fictitious business names for business names in use. State and Federal trademark applications are the best deterrents. We can even file what are called "Intent to Use" applications if the name is not yet in use but the owner intends to use it within the next one to two years. That application protects the name until the owner is ready to actually use - and it prevents someone from tying up that name by filing the same type of application in bad faith. The time and money needed to take these protective measures is well spent.

Think Through Marketing Campaigns

I have dealt with several disputes in the past few years involving advertising services. The usual scenario is that an advertising company, often a search engine optimization (SEO) firm, will sell my client on a lot of expensive services. Those services don't result in new leads for my client. But, my client will have a large bill to pay.

For instance, a company that is a business to business service provider buys an expensive package of services from an SEO firm. The company's website has very high rankings on Google searches for its area of expertise, but no new business comes in. The problem is that the company's potential customers are not looking for that kind of service provider on the Internet.

So, the SEO campaign was a waste of time and money. And, the disappointment leads to a dispute over money since the company has expended considerable monies and time in the SEO campaign.

Legally, the SEO firm did everything that it said it would do even if it didn't generate any leads. So, the company buying the campaign owe the money even if it didn't generate any new revenue. I have to tell my clients that if they hired someone to dig a hole in their yard, they would have to pay the hole digger, even if the hole had no purpose.

My recommendation to my clients is that they do some serious marketing research and hire an independent marketing consultant or business coach before investing in any expensive marketing services.

This is not legal advice. But it is a common ground for disputes, so I thought I would comment on it.

Think through what you sign

I have been dealing with several matters in the past year that have dealt with business persons signing contracts without clearly thinking them through.

Usually, the individual involved signs the contract order to get money or close a deal that he or she thinks must be done or that is absolutely necessary. In a sense it is a sign of the times that business persons are thinking along those desperate lines.

The problems that arise are many. It is not a good deal. The terms are vague and contradictory. Some times, a business owner will fail to sign as an officer of the business entity (such as a corporation), so that the business owner is personally liable.

Haste makes waste and, in this case, the waste of time and money in legal disputes. People are in such a hurry and blinded by need that they stop thinking.

If it is a deal that must be done, particularly if it has to be done soon, then it is trouble.

My suggestion is that business owners slow down. Nothing has to be signed today. Put the agreement aside and read it again tomorrow. Have someone else read it through - particularly an attorney. It can save you an enormous amount of grief and money.