Nondisclosure Agreements, Confidentiality Agreements, and Trade Secret Law

The Enforceability of Non-Solicitation Agreements and Non-Compete Agreements in California

[About the author: Scott Lesowitz is a Harvard Law School graduate and former Assistant United States Attorney based in Los Angeles, California. His e-mail address is scott@lawbylg.com, and his phone number is 323-452-9909.]

This article addresses two related topics: the validity of agreements under which an employee may not compete with the employer post-employment and the validity of agreements under which an employee may not solicit other employees post-employment.

Solicitation of Customers

Under California law, contracts in which one agrees not to engage in a business, trade, or profession are unenforceable. California Business and Professions Code, § 16600. (The only exceptions involve a sale or dissolution of a business and divorces). Even agreements not to engage in a specific business, trade, or profession in a small geographic area for a limited amount of time are unenforceable. (However, agreements in which an employee promises not to compete with an employer while employed are generally enforceable.) This is different than the common law and vast majority of states where noncompete agreements with employees are enforced if reasonable and narrow.

For example, in KGB, Inc. v. Giannoulas, 104 Cal.App.3d 844 (1980), the defendant had worked as a mascot who wore a chicken suit for the plaintiff. The defendant had entered into an employment agreement with the plaintiff-radio-station that barred the defendant from working as a mascot for a radio station in the San Diego market for five years after the end of his employment. The Court of Appeal held that this provision was unenforceable, and the defendant was free to wear a chicken suit for pay anywhere he wanted. (Unsurprisingly, the court in Giannoulas went to great lengths to emphasize the importance of the case even though it involved a man in a chicken suit.)

However, if the (now former) employee committed a trade secret misappropriation (a broad term for a trade secret violation which includes theft, use, and disclosure of a trade secret) of a customer list, a court may prohibit the employee from soliciting business from customers on the list. Morlife, Inc. v. Perry, 56 Cal.App.4th 1514 (1997). However, a customer list must be sufficiently valuable and unknown to competitors to constitute a trade secret protected under the law. Aetna Bldg. Maintenance Co. v. West, 39 Cal.2d 198 (in bank, 1952). This should be construed as a narrow exception to the specific customers on the customer list and would be limited to a small subset of the total market.

Furthering the difficulty for employers, California rejects the so-called “inevitable disclosure doctrine.” Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443 (2002). In jurisdictions that allow the “inevitable disclosure doctrine,” a court may prohibit a former employee with knowledge of a trade from working for a competitor or starting a new business solely based on the former employee’s new position being substantially similar to his or her former position. McGowan & Co., Inc. v. Bogan, 93 F.Supp.3d 624, 645 (S.D. Tex. 2015).

Solicitation of Employees

The state of the law of agreements not to solicit employees to join a competing business is in flux.

The court in Loral Corp. v. Moyes, 174 Cal.App.3d 268 (1985) held that agreements not to solicit employees are enforceable.

However, on November 1, 2018, the court in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal.App.5th 923 (2018), doubted that the Moyes holding is still good law due to intervening authority from the Supreme Court of California. The court in AMN Healthcare found that restrictions against solicitation of employees are most likely always unenforceable. At the least, unenforceable where obtaining or supplying employees constitutes the primary business activity of the company. Id. at 939. Under either Loral Corp. or AMN Healthcare, an agreement cannot be enforced that would prevent an employee from seeking out employment with the competing business on his or her own.

What Constitutes Solicitation

However, not all interactions with customers constitutes solicitation.

Generally, merely informing customers of new employment or a new business venture does not constitute impermissible solicitation. Hilb, Rogal & Hamilton Ins. Services v. Robb, 33 Cal.App.4th 1812 (1995) (No solicitation occurred where insurance agent informed customers of his employer of his new employment, and then complied with request from certain customers to move their accounts or asked for quotes.); American Credit Indemnity Co. v. Sacks, 213 Cal.App.3d 622, 634-36 (1989).

However, a court found that solicitation constituting trade secret misappropriation occurred where a former employee sent out an announcement that the former employee was starting a new business, gave a brief reference that the new business is an “interesting alternative” to existing businesses and that the former employee would be happy to discuss the new business with the recipient of the announcement. Id. at 636-37. Providing false or misleading information in an announcement of new employment or a new venture makes it more likely that a court will find impermissible solicitation. Reeves v. Hanlon, 33 Cal.4th 1140 (2004) (basing finding of solicitation partly on representation in announcement led customers to believe that former employer had gone out of business).

There also is likely no impermissible solicitation where the acquisition of the customer was the result of general marketing efforts. There also may be no solicitation where the former employee did not utilize knowledge of information from a customer list but rather the quality and pricing of new services drove the switch in business. Southern California Disinfecting Co. v. Lomkin, 183 Cal.App.2d 431 (1960).

It must be remembered that the unless the former employee does something wrongful or engages in unfair competition, the former employee is permitted to compete against his or her former employer. Brack v. Omni Loan Co., Ltd., 164 Cal.App.4th 1312 (2008).

[About the author: Scott Lesowitz is a Harvard Law School graduate and former Assistant United States Attorney based in Los Angeles, California. His e-mail address is scott@lawbylg.com  and his phone number is 323-452-9909. This page is for educational purposes only. No legal advice or assistance are given.]

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