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Enforcing a Non-Compete Agreement

Christopher Brandlin

California State Courts Are More Likely To Enforce An Employer’s Non-Compete Agreement When Trade Secrets Are Involved

Under Business and Professions Code §16600, every contract where one is restrained from engaging in a lawful profession, trade, or business of any kind, is to that extent void. Some employers assume that this code section is a rule that non-competition employment agreements are not unenforceable. That is an incorrect assumption. The purpose behind Business and Professions Code §16600 is to ensure that every citizen retains the right to pursue any lawful employment and enterprise of their choice, and protects the important legal right of persons to engage in businesses and occupations of their choosing.

Case Study Silguero V Creteguar, Inc. (2010)

Silguero v. Creteguard, Inc. (2010) 187 Cal.App.4th 60.

In the Silguero case, the Court of Appeals held that an employer may be liable for wrongful termination in violation of public policy for terminating an employee who enters into an unenforceable covenant not to compete with a prior employer. The employee, Silguero, entered into a Confidentiality Agreement with her former employer, Floor Seal Technology, Inc. (FST), which prohibited her from engaging in sales activities for 18 months following either her departure or termination. After Silguero was terminated from FST, she found employment with Creteguard, Inc. FST then contacted Creteguard and asked for its cooperation in enforcing its agreement with Silguero, including the provision prohibiting her from engaging in sales activities for the 18-month period. Creteguard’s CEO agreed and terminated Silguero because she had signed the non-compete agreement with FST. Silguero then filed a lawsuit for wrongful termination in violation of public policy against Creteguard and alleged that the agreement enforced by Creteguard was void pursuant to §16600 of the Business and Professions Code. Silguero alleged that there was an understanding between Creteguard and FST pursuant to which Creteguard would honor FST’s noncompetition agreement. Silguero, supra, (2010) 187 Cal.App.4th 60, 71.

Creteguard admitted in writing that it entered into this understanding with FST, although it believed that non-compete clauses may not be legally enforceable in California. However, Creteguard stated that it honored the non-competition agreement, since it would like to keep the same respect and understanding with colleagues in the same industry. The Court in Silguero held that the understanding between Creteguard and FST would be void and unenforceable under §16600 because it “unfairly limits the mobility of an employee and because FST should not be allowed to accomplish by indiscretion, that which it cannot accomplish directly.” Silguero, supra, (2010) 187 Cal.App.4th 60, 71 (citing VL Systems, Inc. v. Unisen, Inc. (2007) 152 Cal.App.4th 708.

Although the Silguero case held that Business and Professions Code §16600 prohibits non-compete employment agreements, other courts have distinguished the interpretation of Business and Professions Code §16600. When the purpose of the non-compete agreement is to prevent the disclosure of a former employer’s trade secrets, courts have been more likely to enforce such agreements to prevent unfair business practices. One major issue that has motivating employers to draft non-compete agreements is to prevent disclosure of the company’s trade secrets. A customer list is a trade secret, if it contains information that is valuable because it is unknown to others. and the owner of the list has attempted to keep it secret. American Credit Indemnity Co. v. Sacks (1989) 213 Cal.App.3d 622.

Every employer values its customer list as a source of referrals and consistent business. California Labor Code § 2860 states: “Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.” California Labor Code § 2860. Under California Business and Professions Code §17200, unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500) of Part 3 of Division 7 of the Business and Professions Code.”

If a former employee was previously employed by a former employer for years during which he learned or acquired the names, addresses, and requirements of former employer’s customers, injunctive relief is justified. Alex Foods, Inc. v. Metcalfe (1955) 137 Cal.App.2d 415. Furthermore, if a former employee undertakes to use such information in unfair competition to the detriment of a former employer, such knowledge is a part of the goodwill of the business of the former employer, and is a trade secret. For the former employee to act on it is an improper use of confidential information and amounts to unfair competition. Alex Foods, Inc., supra (1955) 137 Cal.App.2d 415, 442. In the Alex Foods case, a former employee, Metcalfe, voluntarily resigned from Alex Foods to work for a competitor, Torgerson, in the food industry. Although Metcalfe did not print out any customer lists, he remembered all of his previous customers’ locations and advised the manager at Torgerson that he was more than familiar with the Orange County area. Metcalfe became the “routes salesman” for Torgerson and brought more business for the company, including business from some of his previous customers at Alex Foods. Alex Foods then sought a temporary restraining order against Metcalfe for unfair business practices. The Court of Appeals in Alex Foods remanded the case to the trial court and stated that even though Metcalfe never signed any non-compete agreement, which would preclude him from working with any competitors after his employment, the injunction should restrain him from soliciting, selling or delivering to customers who may have been wrongfully or unfairly solicited by Metcalfe, and that the injunction may also run against defendant’s new employer as well. Alex Foods, Inc., supra (1955) 137 Cal.App.2d 415, 444.

Present California Law

Under present California law, a person is generally free to compete with a former employer, but there are limits on that freedom. Robinson v. Jardine Ins. Brokers Intern. Ltd. (1994) 856 F.Supp. 554. In theRobinson case, a former employee brought an action against employer regarding validity of an alleged employment agreement containing a non-compete clause. Although the court in Robinson held that the specific non-compete clause was unenforceable, the court cited the Moss case and noted that an employer may, under certain circumstances, contractually prohibit an employee from soliciting its clients or raiding its workforce, for a limited period of time following termination of employment. Moss, Adams & Co. v. Shilling (1986) 179 Cal.App.3d 124. Even in the absence of a contract, an employee may not use a former employer’s trade secrets, including client lists and client information, to solicit clients. Moss, supra,(1986) 179 Cal.App.3d 124, 128.

Protect Your Business and Trade Secrets

In summary, courts are likely to enforce an employment agreement that restrains a former employee from competing against its former employer, if the former employee intends to use, or has already used, his former employer’s trade secrets, including client lists or client information, to solicit business for the benefit of the new employer. Courts have held that such trade secrets include customer lists, company policies, recipes, formulas, and passwords. Everything that an employee acquires by virtue of his employment, except the compensation, which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment. Employees should be advised not to directly or indirectly solicit any customers or clients from a past employer. If the employee engages in this conduct, the employee will ultimately be legally restrained from using trade secrets, including client’s names, addresses, phone numbers and email addresses which were acquired during their employment. The former employee should be prohibited from soliciting the former employer’s clients because it involves a trade secret acquired during the employment, containing information that is valuable, being unknown to others, and the owner of the list has attempted to keep it secret to protect his business.

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