No Solicitation Clauses-Are They Yesterday's News?
Many employers use confidentiality agreements in order to protect the trade secrets which they have developed at great expense. In many of those agreements, companies include non-solicitation clauses to prevent exiting employees from poaching existing customers and coworkers when they leave. A subject of much controversy of late is whether those non-solicitation provisions are valid or are unenforceable under California’s unfair competition law. A recent case has taken on that issue.
California Business and Professions Code Section 16600 sets for the state’s statute regarding unfair competition. In a recent court of appeal decision entitled Retirement Group v. Galante, an employer sued a number of its former employees both for taking its trade secrets and for violating a no-solicitation of customers clause in the confidentiality agreement which they all signed. The Galante court found that that contractual agreements not to solicit customers are not enforceable under California's unfair competition law.
In ruling against the employer the Galante court found that if a former employer misappropriates trade secrets, the former employee may be stopped or “enjoined” in legal parlance, from using those trade secrets. However, it also ruled that no court can enforce a no-solicitation clause just because it is in the agreement.
Galante stands for the proposition that the unfair competition law prevents a court from enjoining a contractual clause that bans an ex-employee from soliciting former customers but may enjoin conduct which would independently violate the Business and Professions Code. In other words, the conduct can be stopped because it is wrongful, independent of any contractual promise by the employee.
The message for employers is that a non-solicitation agreement would now appear to be legally unnecessary to create substantive rights because the Trade Secret Act does not require such an agreement for an employer to come within its provisions. Nevertheless, because a non-solicitation clause, which is typically included in a confidentiality agreement, may be part of the evidence showing that the employer takes reasonable measures to maintain the secrecy of trade secrets. It remains to be determined by the courts whether employees will be able to successfully attack confidentiality agreements which include no-solicitation provisions on the grounds that they are overly broad and thus inherently unfair.
