Southern California Employment Law Report : Los Angeles Employment Lawyer & Attorney : Diane Crumpacker : Crumpacker Law Group : Discrimination, Disability

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.

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It has long been the rule in California that covenants not to compete are generally unenforceable.  Since roughly the late 1800s, California courts and the legislature have felt that restricting an employee from moving from one employer to the other is against the public policy of the state.  While there have been certain exceptions to this blanket rule against such covenants not to compete, those exceptions do not typically apply when an employee either quits or is terminated and goes to work for a competitor of his or her former employer.

A recent decision by the California Supreme Court has confirmed this sentiment that our courts will not permit an employer to prevent its former employee from working in the business with which they have become familiar.  In a case entitled: Edwards II vs. Arthur Andersen LLP, the well known accounting firm tried to uphold a non compete contract which it had required its former employee to sign in 1997.  Edwards  was a former tax manager who worked in the firm's Los Angeles office.  The agreement he signed purported to prohibit him from working for or soliciting Andersen clients for a certain period following his departure from the company. In finding that the covenant at issue violated California's long standing rule, the court noted that there are certain circumstances in which such covenants would be enforced.

California's Business and Professions Code, Section 16600 et. seq. provides that employers may restrict a former employees ability to compete when a person sells the goodwill of a business, when an owner of a business disposes of all of his or her ownership interest in a business or when a partner, in anticipation of the dissolution of a partnership, agrees not to compete.  Because none of these situations applied to the Edwards' factual scenario, the court struck down his non-compete as an invalid restriction of his ability to make a living.

While at first blush, California employers may gasp at the potential reach of this ruling, there is really no reason for them to panic.  For most California employers, the true concern is "How do I protect myself from my former employees taking my confidential information and giving it to my competitors?"  The answer is fairly straightforward and is not affected by this recent well-publicized opinion. 

The Andersen ruling doesn't affect an employer's ability to safeguard its confidential data or "trade secrets".  Employers are still free to require their employees to sign Confidentiality or Non-Disclosure Agreements which prohibit them from taking information which they were given or learned while employed by Employer #1 and providing it to Employer #2.  As long as these agreements extend only to the trade secrets or the intellectual property of an employer, a court is likely to enforce the agreement if the employee attempts to share that information with a competitor of the employee's former employer.

In short, the new California Supreme Court ruling, which has gotten a lot of press is really no new news at all.  For a long time, broad covenants not to compete which attempt to restrict an employee from moving from one business to another have been unenforceable.  Likewise, employers have long been permitted to protect their trade secret information from misappropriation with properly drafted non-disclosure agreements. 

All California employers with anything they wish to safeguard from a competitor are well advised to seek legal counsel to help prepare such an agreement.  

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