Two New Cases Focus on Non Compete and Non Solicitation Agreements

It has long been the law in California that an employer cannot require an employee to sign a non compete agreement as a condition of employment. Agreements that try to enforce noncompetition clauses are, with few exceptions, void under California Business and Professions Code section 16600. The Code provides, "…every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

It has also been held that requiring an employee to sign such a restrictive covenant can be considered unfair competition pursuant to Business and Professions Code Section 17200.

Previously, employers were permitted to restrict an employee from competing and improperly soliciting clients if such restraints were tied to the use of the company's trade secrets. However, according to a recent Appellate Court decision, it is likely the prohibition against competition and non solicitation may extend to matters classified as trade secrets.

The basic facts of the case are as follows: The employer of the Plaintiff's required all employees, upon acceptance of employment, to sign an Employee Secrecy, Non-Competition and Non-Solicitation Agreement. The Plaintiffs did sign this agreement and thereafter left the company and went to work for a competitor. The original employer and the subsequent employer sought a decision from the court over the provisions of an employment contract that barred the employees from freely working for a competitor. "The agreements each contained a covenant not to compete which provided that for 18 months after termination of employment the employee would 'not render services, directly or indirectly, to any CONFLICTING ORGANIZATION' in which such services 'could enhance the use or marketability of a CONFLICTING PRODUCT by application of CONFIDENTIAL INFORMATION' to which the employee 'shall have had access during employment."

The agreements also prohibited employees from soliciting business from the company's clients or customers for 18 months after termination from employment.

The Court found the agreement void in violation of the Business and Professions Code, even though the agreement specifically referenced the use of Confidential Information as the means of the unfair competition. So, unless employees engage in conduct that would be otherwise be considered unlawful, such as a violation of the Uniform Trade Secrets Act (CA Civil Code section 3426), it is likely that employers will have no legal recourse against an employee departing to work for a competitor. (Dowell v. Biosense Webster, Inc., 2009 Cal. App. LEXIS 1860).

The concept of Non Solicitation Agreements is to preclude employees from soliciting business and/or employees after they depart from your employ. Recently, the California Appellate Court (4th District) ruled that an employer cannot require an employee to enter into a non solicitation agreement as a condition of employment, UNLESS the agreement is narrowly drafted to only protect the unfair use of trade secrets.

In this recent case, several employees went to work for a competing business upon separation of their employment and they contacted customers of their former employer with information about the services their new employer could provide. The original employer sued claiming the former employees had misappropriated its trade secrets and used the information improperly to solicit the customers of the former employer, all in violation of the non solicitation agreement.

The Court did not agree with the former employer and pointed out a distinction between a prohibition on solicitation under unfair competition laws and prohibitions on the use of trade secrets to solicit customer. It is a well established law that employees cannot use the trade secrets of their employers to solicit customers; but, according to this Court decision, the law does not go so far as to preclude the solicitation of customers entirely. Absent the improper use of trade secrets, or other unfair business practice, a non solicitation clause will not be enforced. (The Retirement Group v. Galante)