Human Property

California’s distaste for non-compete clauses is well known.  With very limited exceptions, an employee can stop working for a company on Friday, and begin working for a direct competitor the following Monday.

The rule is codified in Section 16600 of California’s Business and Professional Code:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Use of non-compete clauses can violate California’s Unfair Competition Law (Section 17200 of the Business and Professional Code).

The rationale for these rules is the belief that Californians should be allowed to practice their trade:

The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.

(Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244, 255; D’Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 933.)

As a practical matter, the restriction on non-compete clauses has permitted a robust labor market for value-adding employees.  And it is perhaps no coincidence that some of the most innovative technological work in the country takes place in California:  a highly sought after engineer or other technical expert can easily jump to another company without worrying about filling up months of “dead time” on account of a limiting non-compete clause.

While these employment laws have nurtured innovation, there is also a tension with intellectual property laws and the protection of a company’s trade secrets.  Suppose an engineer develops a unique (and highly proprietary) technological method or practice, which the company wishes to keep as a trade secret.  The employee gets tired of the company, and leaves the next day for a competitor.  Then, a few months later, the competitor develops a product that looks suspiciously like it relies on the trade secrets the engineer had developed for the former company.

Sounds like there might be a problem?  Maybe — but the answer is highly fact dependent.  Where do you draw the line between an employee’s technical abilities versus the actual trade secret that was developed by that same employee for the former employer?  This is a very common question in trade secret litigation, with no easy answer.

It’s no wonder that companies seek ways to limit the ability of their employees to take proprietary information with them to competitors — the so called “trade secret” exception to non-compete clauses.

Yet faced with this issue last week, the California Court of Appeals refused to recognize this exception, punting the issue for another day.

In Dowell v. Bisosense Webster, Inc., Second District, Div. Two (2009 S0S 636) (certified for partial publication on 11/19/09) (full case here), the California Court of Appeals found two non-compete clauses void and unenforceable under California law.  The defendant Biosense Webster argued that the clauses were valid because they were tailored to protect trade secrets or confidential information.  The court rejected this argument finding the clauses too broad to be limited to trade secrets.

Interestingly, the court punted on the issue of whether or not there exists a trade secret exception that permits the use of non-compete clauses.  However, it expressed doubts about its existence:

Although we doubt the continued viability of the common law trade secret exception to covenants not to compete, we need not resolve the issue here. Even assuming the exception exists, we agree with the trial court that it has no application here. This is so because the noncompete and nonsolicitation clauses in the agreements are not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition.

Companies with employees in California should be wary of depending on non-compete clauses if they wish to protect their confidential information or other trade secrets — they may simply be held as void by the courts if they are too broad.  Good legal counsel should be able to provide advice on the applicability of a non-compete clause to a California employee.