Is there an alternative to a non-compete in California?


1

I have a new business idea and am talking to consultants and potential employees. I would like to get these people under non-disclosure / non-competes. However, both the other company and I reside in California, where non-competes are unenforceable. Is there an alternative in California? Will incorporating elsewhere help? Does the enforcability of a non-compete depend on my location, the counterparty's location, or the company's?

Legal California NDA Non Compete

asked Nov 29 '11 at 09:47
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Brianb
21 points

2 Answers


2

Incorporating elsewhere does not avoid California law if your business operations occur in California - you have to foreign register/qualify for business in CA anyways before legally doing business in CA if you incorporate out of state.

Also be wary of certain quirks in cross-state rulings:
From http://en.wikipedia.org/wiki/Non-compete_clause

California


Non-compete agreements are automatically void as a matter of law in
California, except for a small set of specific situations expressly
authorized by statute. [10] They were outlawed by the original
California Civil Code in 1872.[11]


[edit]Out of state agreements are not enforceable


The preeminent court decision discussing the conflict between
California law and the laws of other states is the 1998 decision
Application Group, Inc. v. Hunter Group, Inc. [12] In Hunter, a
Maryland company required that its Maryland based employee agree to a
one-year non-compete agreement. The contract stated that it was
governed by and to be construed according to Maryland law. A Maryland
employee then left to work for a competitor in California. When the
new California employer sued in California state court to invalidate
the covenant not to compete, the California court agreed and ruled
that the non-compete provision was invalid and not enforceable in
California. Business and Professions Code Section 16600 reflects a
"strong public policy of the State of California" and the state has a
strong interest in applying its law and protecting its businesses so
that they can hire the employees of their choosing. California law is
thus applicable to non-California employees seeking employment in
California.


Whether California courts are required by the Full Faith and Credit
Clause of the United States Constitution to enforce equitable
judgments from courts of other states, having personal jurisdiction
over the defendant, that enjoin competition or are contrary to
important public interests in California is an issue that has not yet
been decided. [13]


[edit]Exceptions - valid non-compete agreements in California


There are limited situations where a reasonable non-compete agreement
may be valid in California.


If an owner is selling the goodwill in their business. [14] When there
is a dissolution or disassociation of a partnership. [15] Where there
is a dissolution of a limited liability company. [16]

Also see:
http://californiaemploymentlaw.foxrothschild.com/tags/applications-group-inc-v-hunte/ Disclaimer: This post is not legal advice nor does it constitute an attorney-client relationship.
answered Nov 29 '11 at 16:01
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Henry The Hengineer
4,316 points

1

If the counterparty is in CA, CA courts will not enforce non-compete provisions (subject to certain exceptions). Please see Choice-of-Law and Non-Compete Provisions.

What you can include in your NDA, however, are (a) acknowledgement that the confidential information constitutes your trade secret and (b) a provision stating that the counterparty may not use the confidential information for any purpose other than a business relationship with you.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

answered Nov 30 '11 at 05:52
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Dana Shultz
6,015 points

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