Morgan Hill Today 2014 03 Spring - Page 20

LEGALLY Speaking Enforcing Agreements Not To Compete? By Craig van Keulen Craig C. van Keulen is a longtime Morgan Hill resident and along with his wife, Mary Ellen, a teacher, and their three children, Chris, Matt and Sarah. Craig has been very active in many local organizations and has served on several governmental commissions. Craig has practiced law in Morgan Hill for over 33 years, and with his brother, Scott, at van Keulen & van Keulen, a p.c., together they provide over 60 years of experience in the areas of business and civil litigation, construction law, landlord tenant matters, complex and general estate planning, trust administration, trust litigation, land development, commercial real estate purchase and sale, business formation and representation. . 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 nonowner 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. 20 M O R G A N H I L L T O D A Y S P R I N G 2 0 1 4