The California Supreme Court itself has declared that non-compete agreements in California are invalid, with only certain narrowly enumerated exceptions, including where non-competes arise from the sale of the business, or the dissolution or the disassociation from the partnership, or the dissolution of a limited liability company.
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Arbitration Clauses and Choice of Law Provisions
Many employers in California conduct business all across the United States. The employee will need to consider whether the non-compete agreement arises in a contract that is otherwise governed by an arbitration clause that has a choice of law provision. A threshold question for the courts will be whether the arbitration clause is valid. If the clause is valid, then the court may well leave it up to the designated arbitrator to decide what state law applies to consider the validity of the non-compete agreement, and then whether the non-compete agreement is valid under that state’s law.
For example, let’s say National Widget Company has a contract that is rolled out all across the country. That contract includes an arbitration clause, and a choice of law provision, such that the law the state of Illinois governs. The services under the contract were performed outside California.
Several complicated scenarios flow from that contract. If the California employee files a lawsuit in the California state court, it is likely that the employer will move to a federal court, within California. At that point a federal court will determine the threshold question of whether the matter should be decided by it, or by an arbitrator in Illinois. If the arbitration agreement is otherwise valid, then the California employee may find himself in a private arbitration before a private arbitrator in Illinois adjudicating whether or not California’s non-compete provision applies under the choice of law provision in the agreement.
Race to the Courthouse
Let’s say that there is no arbitration agreement, but that there is a multi-state employer, and a choice of law provision. Let’s say that the employee involved wishes to accept a job within California but has been working outside of California.
At that point the proverbial race to the courthouse ensues. The employer goes to the friendly jurisdiction where non-compete clauses are valid. The employee would attempt to get into a California court first.
There are many different permutations or scenarios, depending on the domicile of the employee, the domicile of the employer, the content of the choice of law provision, the employment opportunity in California, and who gets to which courthouse first.
Trade Secrets in California
The matter is further complicated by issues surrounding “trade secrets.” Even though non-compete agreements are generally invalid in California, that does not mean that California will not respect bona fide trade secrets.
Trade secrets law in California is governed by the California Uniform Trade Secrets Act (UTSA). Depending on whether a company takes reasonable measures to protect its information, and if the information is in fact valuable because it is kept secret, California courts may recognize that customer lists, business plans, spreadsheets, corporate minutes and agendas, and bid specifications, for example, may be afforded protection as trade secrets.
Therefore, it is very important that an employee leaving the employ of his or her employer does not carry away this type of information. With that said, the question of what constitutes a trade secret is complex. Section 1600 of the California Business and Professions Code “does not invalidate an employee’s agreement not to disclose his former employer’s confidential customer lists or other trade secrets or not to solicit those customers.”
But this begs the issue of what constitutes a trade secret customer list. The customer list is less likely to be regarded as a trade secret if the information in the list is readily ascertainable through other means; if the list does not include pricing and special needs that add value to it; if the list did not take a lot of effort to assemble; if the departing employee helped to create the list and/or had personal contact with the customers; if the customer list is not personal or long-standing or exclusive to the company.
Employees need to be concerned about other things as well. Just because the employee has not breached the trade secret legislation, does not mean that he or she would not be liable for other related actions such as breach of fiduciary duty, self-dealing, interference with contract, prospective economic advantage or unfair competition.
So, the fact that non-compete agreements are invalid in California is a very good thing for employees; but it does not mean that the employees are protected from employment-related torts or tort actions. And these questions need to be explored with employees who ask if the non-compete agreements they have signed are invalid.
Wrongful Termination Lawsuits
Of course, in California, the employer pushing an invalid non-compete agreement has concerns of its own. Moreover, the employee or prospective employee who refuses to sign a non-compete agreement in California can sue for wrongful termination or failure to hire if the non-compete is unlawful, which in most instances it will be.
Indeed, in a noteworthy expansion of the law in this area, and an interesting development for California employers and employees alike, the Court of Appeals in Silguero v. Creteguard, Inc. (2nd Dist. 2010) recently held that an employer is liable for wrongful termination in violation of public policy when it terminates an employee who has entered into an invalid non-compete with his prior employer.
The Silguero decision raises significant issues for employers and employees: It means that a subsequent employer who honors the terms of an invalid prior non-compete agreement and terminates or refuses to hire an employee under the terms of the prior agreement may be held accountable in a wrongful termination lawsuit.
Employers Beware: That Trade Secrets Lawsuit May Backfire
Although the employers typically have superior resources, and the means of pursuing trade secret litigation based on misappropriation, they face grave consequences if their actions are found to be in bad faith with the intention of stifling competition in violation of California law.
In 2009, in the case of Flir Systems Inc. v. Parrish, a Court of Appeals affirmed the decision by a trial court awarding $1,641,216 in attorney fees and costs to two former employees who successfully defended a trade secrets action brought by their former employer, the appellate court agreed with the trial court that the action was filed and maintained in bad faith within the meaning of the California Uniform Trade Secrets Act.
Regardless of whether a non-compete agreement is invalid in California is just the beginning of the inquiry. Important issues relating to arbitration clauses, choice of law clauses and the race to the courthouse may also be involved.
There are many pitfalls for the departing employee to avoid, in regard to trade secrets misappropriation, and other violations; and there may be remedies, and causes of action, providing compensation for employees who have been unfairly terminated because of invalid non-compete agreements in California.
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