Exceptions to the Prohibition of Non-Solicitation Clauses

June 5, 2014

A non-solicitation clause is a contract where an employee agrees not to solicit a company’s clients, customers, or other employees after leaving that company. Non-solicitation clauses are usually a part of larger documents like employment contracts, non-compete agreements, or non-disclosure agreements. A non-solicitation clause can also be presented to an employee simply as a standalone document. Presentation can take place during any point of employment (hiring, severance, etc.).

It is important to know that clients, customers, and employees are free to make their own choices. In other words a non-solicitation clause cannot prevent a client, customer, or employee from voluntarily choosing a different company. A non-solicitation clause only prevents a departing employee from improper solicitation (i.e. using a former employer’s client list to start up a new business).

When it comes to non-solicitation clauses, the general rule is that they are unenforceable in California. However, with most rules come exceptions. There are three express statutory exceptions and two, more limited, court-recognized exceptions to California’s prohibition on non-solicitation clauses.

The three statutory exceptions deal with the sale of a business’s goodwill, the dissolution of a partnership or dissociation of a partner, and the termination of a member’s interest in a limited liability company (LLC). Any one of these situations can involve an agreement that prevents the seller, partner, or member from operating a similar business within the same geographical area. Therefore, when faced with one of these circumstances, there are statutes in place that allow for enforcement of non-solicitation clauses.

In addition to the statutory exceptions, there are also two court-recognized exceptions that allow for the enforcement of non-solicitation clauses: the “narrow restraint exception” and the “trade secret exception”. The narrow restraint exception allows for non-solicitation clauses that prevent employees from practicing in a small part of their trade. For example, a non-solicitation clause that excludes a departing employee from a small part of the stock market meets this exception because it is not excluding the former employee from practicing within his profession.

The trade secret exception allows for non-solicitation clauses that are narrowly tailored to protect the former employer’s trade secrets. Public policy allows for these two exceptions because they do not completely bar former employees from engaging in their profession. Therefore, so long as a non-solicitation clause does not bar a departing employee from engaging in his chosen business or trade, then there is a good chance it will be enforceable.

In 2008, the California Supreme Court refused to recognize the narrow restraint exception. However, despite this first exception being inapplicable, the applicability of the trade secret exception was never addressed. Therefore, according to the California Supreme Court, non-solicitation clauses that rely on the narrow restraint exception are prohibited unless they fall under one of three statutory exceptions mentioned above. The trade secret exception has yet to be expressly overruled or invalidated by the California Supreme Court, which means it is still applicable.

While non-solicitation clauses are generally prohibited in California, there are exceptions that allow employers to overcome the prohibition so that business interests remain protected. Employers should first start with the three statutory exceptions. If the clause does not qualify under one of the statutory exceptions, then employers could still try to gain enforceability under the trade secret exception.

However, just because the California Supreme Court has yet to expressly overrule this exception does not automatically guarantee enforcement. Lower California courts have gone both ways when deciding whether to recognize the trade secret exception. Therefore, while this exception is still viable, employers should discuss other legal options first before pursuing the trade secret exception.

Lindy GiacopuzziRotz

By

Lindy is a 3L attending California Western School of Law. She has a focus in Child, Family, Elder law and is looking to graduate next spring.

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