Today’s employers face a workplace in which employees change jobs more frequently than ever often to start new businesses in the same market as their former employer.
That trend raises an array of troublesome situations involving competition by departing employees. Current employment law walks a fine line between maintaining fair competition in the marketplace and ensuring the right of employees to pursue their chosen occupations with the needs of employers to protect confidential information.
A number of states will enforce contracts forbidding employees from competing with their former employer after leaving a job. But not California. In general, California’s statute prohibits such “covenants not to compete.”
There are, however, two important exceptions to this rule: when a business is sold; and when trade secret information is used.
California permits a covenant not to compete when a person sells the good will of a business; when a business-owner disposes of all of his or her shares of a company; and when an owner sells all or substantially all of the operating assets.
Such a covenant may be enforceable if it is narrowly written to prevent the seller from carrying on a similar business in a specifically described area in which the seller’s business was conducted.
In addition, it has long been the law in California that employees may not misappropriate their employer’s trade secrets. Of course, precisely what type of information constitutes a “trade secret” has been the subject of many debates.
Under California’s Uniform Trade Secrets Act, an employer who wishes to protect confidential information must show that the information is truly confidential and not generally known outside the business.
The employer also must show that the employee misappropriated the information, and that the disclosure or use of the information has caused damage.
Employers often encounter problems when a former employee attempts to compete with their former employer by soliciting the same customers or workers. As a general rule, an employer who wishes to prevent an employee from engaging in such solicitation must have a written anti-solicitation agreement with its employee. As long as such an agreement is reasonable in duration and scope, an employer can successfully restrict the solicitation of its employees, customers and clients.
Even without an anti-solicitation agreement, a former employee may not use any of the trade secrets of its employer to solicit the former employer’s customers.
For example, if an employer’s customer list constitutes a trade secret, a departing employee may not use it. A customer list that qualifies as a trade secret may include not only a written list, but also an unwritten list that exists only in the memory of the employee.
Likewise, a “preferred customer list” may be a trade secret. The majority of cases that have prohibited employees from using their former employer’s customer lists have required that the list contain information that is valuable because it is unknown to others.
While a former employee may, under certain circumstances, be prohibited from soliciting a former employer’s customers, that same employee may not be prohibited from simply accepting the business of those customers in the absence of any solicitation.
Advertisements aimed at the general public do not generally constitute unfair solicitation. Neither does a letter merely notifying an employer’s customers of the employee’s new place of employment, and the subsequent discussion of business at the customer’s invitation.
In California, a current employee may make some “preparations to compete” with his or her employer, but must be careful not to go too far. One California court that found against an employee felt that, although no confidentiality had been breached, the employee had transferred his loyalties to the new employer while still on the old employer’s payroll.
Despite the complexities of the laws involved, there are a number of preventative steps that can be taken in order to protect confidential proprietary information.
The cornerstone of any such system is a well-drafted confidentiality and anti-solicitation agreement. Employers should have their key employees and preferably all employees sign confidentiality agreements that prohibit the use of confidential information.
These agreements should include a clause that prohibits the employee from soliciting the employer’s current employees and customers for a reasonable period of time.
Employers also should take measures to limit their employees’ access to confidential information, and remind all departing employees, in writing, of their obligations to keep company information confidential and to return all company property.
Diane Crumpacker is a principal with the law firm of Fried, Bird & Crumpacker in Los Angeles.
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1941 with feedback and topic suggestions.