Many businesses understandably want to prevent their employees from leaving their jobs and seeking employment with competitors. The reasons may vary, but the desire typically stems from concern regarding company secrets falling into the hands of those who could use them to do the most damage to the bottom line.  It is therefore common to see employment contracts that prohibit an employee either from competing directly with his or her former employer or from joining a competing company.

Courts always carefully construe these provisions. State laws are essentially unanimous in requiring that the provisions be reasonably limited, with their duration and scope – geographic and otherwise – narrowly tailored to protect the employer’s legitimate interests. Any ambiguity in such provisions almost always is construed against the employer, so employers must exercise considerable care in drafting them. In some states, however, non-compete clauses are even more particularly disfavored. For example, California law affirmatively prohibits “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” (Cal. Bus. & Prof. Code § 16600) In addition, courts construing the California law have made it clear that the statute applies not only to “traditional” non-compete clauses that expressly restrain an employee from engaging in competitive activities following termination, but also to differently structured provisions that have substantially the same effect as an express prohibition.

A recent example is found in the opinion of the U.S. District Court in the Northern District of California in the case of Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co. (May 20, 2009). There, the employer, Applied Materials, had attempted to enforce the following patent assignment clause against former employees and their new employer:

In case any invention is described in a patent application or is disclosed to third parties by me within one (1) year after terminating my employment with APPLIED, it is to be presumed that the invention was conceived or made during the period of my employment for APPLIED, and the invention will be assigned to APPLIED as provided by this Agreement, provided it relates to my work with APPLIED or any of its subsidiaries.

In defending the clause, Applied Materials argued that the clause merely created a presumption that a former employee would have the opportunity to rebut in order to avoid an assignment. However, the court disagreed, noting that the provision “does not state that an employee may rebut this presumption, nor does it state how an employee would do so.” The court further held that because the clause “touches post-employment inventions, regardless of when they were conceived or whether they were based on Applied's confidential information, [it] necessarily operates as a restriction on employee mobility.” As a result, the court determined the clause to be unlawful and void under California law and incapable of reformation.

Cases such as Applied Materials emphasize the point that, regardless of the jurisdictions in which they are located, companies need to look to various kinds of measures to protect their trade secrets and should not rely solely or even substantially on non-compete clauses. California businesses have a special burden to overcome, but even businesses in states that allow non-compete clauses must be wary of the scrutiny to which such provisions are subject. It is important to consult with counsel to identify and implement a holistic and diverse regime of trade secret protections.