LEGALLY
Speaking
Enforcing Agreements Not To Compete ?
By
Scott van Keulen
Scott van Keulen is a long-time South County resident . He has practiced law for over thirty years and with his brother , Craig , at van Keulen & van Keulen , they provide over 60 years of experience in the areas of complex and general estate planning , trust administration , trust litigation , land development , commercial real estate purchase and sale , business formation and representation , business and civil litigation , construction law and landlord tenant matters .
PICTURE THIS SCENARIO :
You have been in business many years , you have several employees , you have all of them sign employment agreements , which sets forth their salary or hourly rate , their benefits , and you confirm that they are all employees at will , plus their employment agreements include a covenant not to compete and a covenant not to solicit your other employees if they leave your employment . Then your most trusted employee , who has been with you a long time , who knows all of your customers , knows how you market to your customers , what your pricing policy and terms are with all or most of your customers , quits and opens a competing business in the same town . Not only does the ex-employee start competing against you , he / she starts contacting your other employees and tries to talk them into coming to work for him / her .
You believe that because you have an employment agreement that contains the covenant not to compete and a covenant not to solicit , your attorney can get a restraining order to stop the ex-employee immediately , and then you will sue the ex-employee for the loss of business and the damage caused when they raided your employees . Not so fast .
For more than a hundred years , the general statutory rule in California is set forth in Cal . Bus . & Prof . Code § 16600 which provides that contractual restraints on an employee ’ s ability to engage in a trade , business or profession are unenforceable unless you fall into three narrow statutory exceptions . Those three statutory exceptions are to protect goodwill on the sale of a business , dissolution of a partnership and a limited liability company . Then about 30 years ago , a California intermediate appellate court case ruling was issued which held that a termination agreement was not void if it restrained the employee from disrupting , damaging , impairing , or interfering with the employer ’ s business , including “ raiding ” its employees . This gave hope to employers that they could at least prevent their ex-employees from stealing their employees .
The reasoning and analysis , however , in a later 2008 California Supreme Court case made it clear that any employment agreements that restrict competition are invalid under 16600 even if they are narrowly drafted . Although the California Supreme Court in this case did not specifically address the enforceability of covenants not to solicit , there is language in several other cases that indicate that covenants not to solicit do impact and restrict a party ’ s business practices , and under the California Supreme Court case reasoning would therefore not be enforceable . Since the California Supreme Court made it clear that the “ reasonableness ” of the restriction is not a factor in determining whether the restriction will be enforced , many practitioners now believe that if the California Supreme Court were to decide a case involving a covenant not to solicit , they would invalidate it if they are consistent with their prior case decision .
Nevertheless , it appears that employers may still protect their “ trade secrets ” and prevent ex-employees from taking them and using them to compete against them . Although the 2008 California Supreme Court specifically did not address the application of the “ trade secrets ” exception to § 16600 , several other courts have upheld claims by employers against employees for stealing “ trade secrets .” Although there still exists some uncertainty as to whether or not the “ trade secrets ” exception would be enforced by the California Supreme Court because of the broad public policy to invalidate any action which restricts competition .
So what should employers do ? First , in any employment contract with an employee who is not a part owner of the business , employers should remove any covenants not to compete , and probably do the same with any covenants not to solicit . A big risk to the employer is if they were to bring suit against an employee for breaching a covenant not to compete or covenant not to solicit and they lose , the ex-employee could have a tort claim against the employer for intentionally interfering with the ex-employees prospective economic advantage .
Second , the employer should have all of its employees sign confidentiality agreements which specifically puts the employees on notice that there is certain information about the employer ’ s business which the employer considers a “ trade secret ,” and which the employee may become aware of or have access to , as part of performing their duties as an employee . Under the confidentiality agreement , the employee would be restricted and prevented from disclosing any “ trade secret ” information after their employment ended , and the employer would then be entitled to take action to prevent the disclosure or use by the ex-employee of that “ trade secret ” information .
Of course , it has always been difficult or impossible to prevent ex-employees from taking what they “ know or have learned ” while working for you and using it in their new business or for their new employer . If the ex-employee , however , were to tell or disclose to a new employer or a customer your “ trade secret ” information you probably would be able to take action against them . Therefore , it is vitally important for you to do everything you can to treat your most valuable business information as a “ trade secret .” I analogize a “ trade secret ” for clients to actual “ cash .” Would you leave a pile of cash sitting out in the open for anybody to come and take ? No , you would keep it locked up and limit employees ’ access to it to only those who needed it for their work . The employer ’ s actual actions in protecting the information usually determines if it is truly a “ trade secret ” that the employer can prevent someone else from using after they leave their employment .
Under California ’ s current law , if you are an employer , you may not be able to prevent a non- owner employee from leaving and going out to compete against your business , unless you can show that they have taken and are using some “ trade secret ” from your business . In addition , your agreements must be consistent with the law or you could end up being on the wrong side of a claim . If you have questions , please do not hesitate to contact our firm and we will be glad to advise you what your options are , and what actions you should take .
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