California Employer Challenges Restrictive Covenant Use by Out-of-State Employers

Author: Marta Moakley, XpertHR Legal Editor

July 20, 2017

Veeva Systems, a California-based, cloud-based software provider for the life sciences industries, has filed a claim in the superior court of California against three companies that use post-termination non-compete, confidentiality and nondisparagement clauses in employment agreements. Veeva alleges that those practices restrict fair competition and violate California law. The claims were filed against New York-based Medidata, Connecticut-based QuintilesIMS and New Jersey-based Sparta Systems. All three of these companies are rivals that have sought court orders against former employees seeking to work for Veeva, as well as filing claims against Veeva itself.

California has one of the strictest laws against covenants not to compete. A vast majority of other states, however, allow for the enforceability of these restrictive covenants, providing for a range of regulatory breadth across the nation. Often, states carve out employee protections for certain industries, such as medical professionals. Even in California, however, employers may require employees to sign confidentiality, nonsolicitation and nondisclosure agreements.

In a press release, Peter Gassner, Veeva founder and CEO, argues that "in most states, companies essentially have the power to dictate where employees can work and keep them locked in jobs." The lawsuit aims to stop out-of-state companies' "widespread misuse of non-compete, confidentiality and non-disparagement agreements that restrict employees' basic rights."

Supporters of restrictive covenants argue that the employee restrictions protect employer-owned trade secrets and confidential information, making them essential tools in promoting business interests. In addition, the clauses may boost employee retention.

Restrictive covenants are common in a number of industries, including technology and engineering. However, their use has broadened to include workers in a variety of industries, including low-wage jobs. Last year, the Obama Administration addressed the proliferation of noncompete agreements in employment, taking the position that those covenants had been misused in certain situations. However, the current administration may not take a similar position.