NONCOMPETITION AGREEMENTS TAKE ANOTHER HIT

As we reported in our Autumn 2008 Newsletter, the California Supreme Court held in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) that agreements restraining employees from competing with their former employers are invalid under section 16600 of the California Business and Professions Code unless they fall within a narrow statutory exception. Two recent cases have continued to limit the validity of post-employment restraints.

In The Retirement Group v. Galante, 176 Cal. App. 4th 1226 (2009), the appellate court vacated, as contrary to section 16600, the lower court’s order prohibiting the defendants from soliciting any of The Retirement Group’s current customers. The court did so despite The Retirement Group’s argument that the prohibition was narrowly tailored to prevent the misuse of confidential information about its customers.

The Galante court decided that “protection of trade secrets” is not an exception to section 16600. However, the court acknowledged that unlawful forms of competition, such as trade secret misappropriation, could properly be restrained. Reconciling section 16600 with California’s laws against unfair competition, the court held that competitive conduct like customer solicitation may only be prohibited if “it is wrongful independent of any contractual undertaking.” In other words, competition may not be contractually restrained just because the restraint is deemed important, useful, or even necessary to prevent the misappropriation of trade secrets. Rather, the restraint may only validly forbid the conduct that itself constitutes trade secret misappropriation.

The court therefore invalidated the lower court’s bar on solicitation because it was not limited to solicitation in which The Retirement Group’s trade secrets were misused in the process, i.e. “independently wrongful” solicitation. In contrast, a separate portion of the lower court’s injunction, which barred solicitation by use of specifically identified trade secret information, was valid because the conduct proscribed was “independently wrongful.”

In the second case, Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564 (2009), the appellate court voided portions of an agreement that prohibited employees from soliciting company customers and further prohibited them from working for competitors if such work “could enhance the use or marketability” of a competing product “by application of” information the agreement defined as confidential.

The Dowell court said that it “doubt[ed]” the “continued viability” of any trade secret exception to section 16600 but refrained from deciding that issue. Instead, the court found, “Even assuming the exception exists…the noncompete and nonsolicitation clauses in the agreements are not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition.” As such, they were held void under section 16600. More worrisome, the court held that the company’s use of such a broad noncompetition agreement was itself unlawful as a form of unfair competition.

What this Means for Employers
Employers that use employment agreements to safeguard confidential company information should closely examine those agreements. Promises by employees not to use or disclose company information post-employment should be narrowly tailored so that the restraint pertains to legitimate trade secrets, as defined by the California Uniform Trade Secrets Act. Agreements that overreach may not be enforced and their use could be judged to violate California laws against unfair competition.