Restrictive Covenants and Trade-Secret Defense

IV. Restrictive Covenants and Trade-Secret Defense

A. Bus. & Prof. Code § 16600 — The Categorical Prohibition

California has voided employee non-compete agreements as a matter of public policy for more than a century. Cal. Bus. & Prof. Code § 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

The California Supreme Court foreclosed any "narrow restraint" exception in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937. Edwards held that section 16600 means what it says: a non-competition agreement, even one narrowly tailored to a particular geographic or temporal scope, is void unless it falls within one of three statutory exceptions (sale of business, dissolution of partnership, dissolution of LLC). Id. at 950. The Court rejected the Ninth Circuit's "narrow restraint" gloss from Campbell v. Bd. of Trustees (9th Cir. 1987) 817 F.2d 499.

Customer non-solicitation provisions sit in a more contested space. AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923 held that an employee non-solicitation clause restricting recruiters from soliciting traveling nurses was void under section 16600 because it operated as a restraint on the recruiters' practice of their profession. Id. at 939. AMN substantially undermined the older Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268 line, and most plaintiff-side practitioners now treat employee non-solicits as presumptively void.

B. AB 1076 and SB 699 (2024 Strengthening Amendments)

The 2024 amendments converted section 16600 from a defense into an offensive weapon.

Senate Bill 699, codified at Cal. Bus. & Prof. Code § 16600.5, provides that a contract void under section 16600 is unenforceable regardless of where or when it was signed, and bars any employer from attempting to enforce a void non-compete. Section 16600.5(e) creates a private right of action: an employee, former employee, or prospective employee may sue for actual damages, injunctive relief, and reasonable attorneys' fees and costs. The statute thus permits affirmative litigation by California workers against employers who assert non-competes — including out-of-state employers seeking to enforce against California-resident employees.

Assembly Bill 1076, codified at Cal. Bus. & Prof. Code § 16600.1, required employers, by February 14, 2024, to send written individualized notice to current and former employees (employed after January 1, 2022) whose contracts contained void non-compete clauses, advising them that the clauses are void. Failure to provide that notice is itself an unfair competition law violation under Bus. & Prof. Code § 17200.

The combined effect is that California employees holding contracts with non-compete or broad non-solicit provisions now have multiple paths to relief: a declaratory judgment, attorneys' fees, and a UCL claim for inadequate notice.

C. The Sale-of-Business Exception (§ 16601)

The principal statutory exception to section 16600 is Bus. & Prof. Code § 16601, which permits a non-compete in connection with the sale of the goodwill of a business or substantially all of its operating assets and shares. The exception is narrowly construed; courts examine whether the seller actually transferred goodwill (as opposed to merely receiving wages or transaction proceeds) and whether the geographic and temporal scope of the restraint is reasonable in relation to the business sold. Equity grants in the ordinary course of employment do not trigger the exception, even where they include token "purchase" formalities.

D. Trade Secret Defense for Departing Employees

California's near-absolute hostility to non-competes does not extend to trade-secret protection. The California Uniform Trade Secrets Act (Civ. Code §§ 3426–3426.11) provides remedies for actual or threatened misappropriation, and injunctive relief can include limited prohibitions on a former employee working for a competitor where doing so would inevitably involve disclosure.

But California has firmly rejected the broader federal "inevitable disclosure" doctrine. Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443 held that the inevitable-disclosure doctrine — which would allow an employer to enjoin a former employee from accepting employment with a competitor on the theory that disclosure of trade secrets was inevitable — is incompatible with the strong public policy of section 16600. Id. at 1462–63. To obtain injunctive relief, an employer must prove actual or threatened misappropriation, not merely the risk of it. Departing employees who carefully separate from confidential materials, decline to recruit former colleagues, and avoid working on substantially identical product matters typically have strong defenses.

V. Executive Separation & Out-of-State Forum Clauses

A. Negotiating Severance and Equity

Executive separations turn on documents most employees never see during their tenure: the offer letter, the equity grant agreement (with its vesting and forfeiture terms), the bonus plan, the change-in-control provisions, and any prior severance agreement or employment contract. The negotiable points typically include:

• Cash severance. Often pegged to a multiple of base salary plus prorated target bonus; defensible packages for senior executives without a contractual floor often start at six months and scale with tenure.
• COBRA premium reimbursement for the post-employment health coverage period, usually 12–18 months.
• Equity acceleration. For double-trigger awards, acceleration on a qualifying termination can be the largest economic component. Even where the plan does not provide it, accelerated vesting is a frequent negotiation point at the senior level.
• Tax structuring. Section 280G "parachute" issues for change-in-control terminations; section 409A compliance to avoid early-inclusion penalties; allocation between wages (W-2) and tort damages (1099) for emotional-distress components.
• Mutual non-disparagement and references — both important to future earning capacity.
• Carve-outs preserving rights under indemnification agreements, D&O policies, vested equity, and ERISA-governed plans.

B. Lab. Code § 925 (Forum-Selection Void)

California-resident employees are protected from out-of-state forum-selection and choice-of-law clauses by Cal. Lab. Code § 925. The statute, effective January 1, 2017, voids any provision in an employment contract entered into, modified, or extended after that date that requires an employee who primarily resides and works in California to (1) adjudicate a claim arising in California in another state or (2) be deprived of California substantive law. The employee may void the provision at her option; if she does, attorney's fees are available.

Section 925(e) carves out employees represented by counsel in negotiating the agreement — a narrow exception that requires actual representation, not merely access to counsel. Employers frequently attempt to deploy out-of-state choice-of-law and forum clauses to evade section 16600 (non-competes) or FEHA's broader protections; Ryze Claim Solutions LLC v. Superior Court (2019) 33 Cal.App.5th 1066 illustrates that section 925 is robustly enforced.

C. Releases and Civ. Code § 1542

A general release in a severance agreement does not, by default, waive unknown claims. California Civil Code § 1542 provides that a general release "does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party."

To waive section 1542, the agreement must contain a specific, conspicuous waiver of its protections, and even then certain rights cannot be released. Statutory unwaivable rights include unpaid wages owed (Lab. Code § 206.5), claims under the Equal Pay Act (Lab. Code § 1197.5), and indemnification rights under Lab. Code § 2802. The Older Workers Benefit Protection Act adds federal layered requirements for releases of ADEA claims, including 21-day consideration and 7-day revocation periods.

The negotiation point for departing employees: employers frequently propose section 1542 waivers as boilerplate. Carving out specific known potential claims (e.g., a pending CRD complaint, a known PAGA claim, or accrued but unvested equity) before signing preserves leverage.

This analysis is for informational purposes only and does not constitute legal advice. Consult qualified counsel for advice specific to your situation. Attorney advertising.