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to that extent void.” In Edwards v. Arthur Andersen, the California Supreme Court confirmed that non-compete provisions contained in employment agreements are typically invalid in California. Specifically, the Supreme Court held that employee non-competition agreements are invalid, even if narrowly drawn, unless the agreement falls within one of the enumerated statutory exceptions to section 16600 (the sale of or interest in a business entity (section 16601), dissolution of partnership or dissociation of the partner from the partnership (section 16602), and dissolution or termination of limited liability corporation (section 16602.5). Although the Supreme Court confirmed that employee non-competition agreements are generally invalid under section 16600, it left for another day questions of whether there is also a trade secret exception to section 16600 which may permit some non-competition provisions with employees and if so, what such an exception means.
California courts have consistently declared section 16600 an expression of public policy to ensure that citizens shall retain the right to pursue any lawful employment and enterprise of their choice. The interests of employees in their own mobility and betterment are deemed paramount to the competitive business interests of employers, where neither the employee nor his or her new employer has committed any illegal act accompanying the employment change. A former employee has the right to compete with his or her former employer, even for the business of those who had been customers of the former employer, provided such competition is fairly and legally conducted.
Some older pre-Edwards cases held that covenants against soliciting customers of a former employer are generally held void as unlawful business restraints except where their enforcement is necessary to protect trade secrets. Accordingly, some employers have continued to use non-solicitation of customer provisions even after Edwards because Edwards did not decide whether there may be a trade secret exception to justify such covenants.
Two recent California Court of Appeal cases, Retirement Group v. Galante and Dowell v. Biosense Webster, Inc., however, cast doubt on the continued use of non- solicitation of customer provisions. In Retirement Group v. Galante, the Court found that a non-solicitation of customer provision found in a preliminary injunction which prohibited former employees of a company, TRG, from “[d]irectly or indirectly soliciting any current TRG [customers] to transfer any securities account or relationship from TRG to [Advisors] or any broker-dealer or registered investment advisor other than TRG,” was improper. The Court reasoned that while it may
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enjoin the former employee’s misuse of trade secret information as violative of either California’s Uniform Trade Secrets Act or as unfair competition, it was improper to order specific performance of a contract enjoining the solicitation of customers.
The Court indicated that “courts have repeatedly held a former employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee’s new business if the employee is utilizing trade secret information to solicit those customers.” The Court reasoned “it is not the solicitation of the former employer’s customers, but is instead the misuse of trade secret information, that may be enjoined.” The Court indicated that “the conduct is enjoinable not because it falls within a judicially-created ‘exception’ to section 16600’s ban on contractual nonsolicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking.” Applying this reasoning to the facts before it, the Court concluded that the non- solicitation provision violated Edwards and could not be viewed as limited in scope to only enjoining the misappropriation of TRG’s trade secrets.
The Court also rejected the argument that the non- solicitation provision could be upheld as an injunction designed to have the limited effect of protecting against the misappropriation of the employer’s trade secrets as another provision in the injunction provided sufficient non-disclosure protections. The Court further held that “[a]bsent the provisions of [the non-solicitation provision] [defendants] could compete with TRG for the business of TRG’s existing customers by employing all available resources and information except for those materials found ‘solely and exclusively on TRG’s databases,’” which constituted protectable trade secrets.
TRG’s argument regarding the so-called “trade secret exception” to section 16600 as a basis to uphold the provision was also rejected by the Court. TRG argued that the conduct enjoined by the non- solicitation provision is outside the boundaries of Edwards because Edwards expressly excepted from its ruling non-competition clauses falling within the trade secret exception to section 16600. Significantly, the Court noted that “[E]dwards did not approve the enforcement of noncompetition clauses whenever the employer showed the employee had access to information purporting to be trade secrets.” Instead, Edwards merely stated it was not required to “address the applicability of the so-called trade secret exception to section 16600 because it was not germane to the claims raised by the employee.”
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