"I want to recommend highly our partner in HR - "One Solution Human Resources". They have helped us in so many areas but especially in HR Strategy & Planning, Leadership Development, Talent Management, Organizational Effectiveness, and Building a Strategic HR Function. We started with a comprehensive handbook but soon expanded our relationship to include areas that I am sorry to say we were totally unaware of or lacking knowledge of for our company. If you represent a company like mine that was constantly pushing these tasks to the back burner, do your company a favor and call One Solution Human Resources. Tap into the knowledge and expertise of a truly professional group. It is a very effective alternative to in-house efforts."
California Court Strikes Injunction on Solicitation of Former Employer's Customers as Too Broad
Showing that California courts generally will protect employees’ right to compete with their former employers for business, a California Court of Appeal has vacated a preliminary injunction prohibiting employees from “directly or indirectly soliciting” their former employer’s customers. The Court found the injunction was broader than necessary to protect the employer’s trade secrets and unlawfully impinged on the employees’ right to compete. The Retirement Group v. Galante, No. D054207 (Cal. Ct. App. Aug. 20, 2009).
The plaintiff, The Retirement Group (“TRG”), provided broker-dealer services. It maintained a database of current and potential customers with their contact and other information. The company took precautions to keep the information secret, including requiring employees to sign confidentiality agreements and configuring the database to preclude electronic copying.
When several employees left to form a competing company, TRG sued them for trade secret misappropriation. It alleged they took customer information from TRG’s database to solicit TRG’s current and potential customers. The trial court granted TRG a preliminary injunction that enjoined numerous categories of conduct by the defendants.
One category of prohibited conduct barred the defendants from “using in any manner TRG information found solely and exclusively on TRG databases, [but] similar information found on servers, databases and other resources owned and operated by other entities or businesses is excluded from the injunction.” A second category prohibited the defendants from “directly or indirectly soliciting any current TRG customer to transfer any securities account or relationship” from TRG to the defendants’ business.
The defendants appealed, challenging only the second category of the preliminary injunction. The Court of Appeal vacated that portion of the injunction as too broad for the limited purpose of protecting against the misuse of TRG's trade secrets.
The Court explained there was a “tension between two competing strands of legal principles in California.” First, “California courts refuse to enforce most noncompetition agreements as violative of a strong public policy, embodied in [California] Business and Professions Code section 16600, favoring free competition.” The Court noted that in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), California’s highest court rejected a non-statutory “narrow restraint” exception to section 16600, affirming that noncompetition agreements outside of statutorily-prescribed exceptions are unenforceable, even if they still permit some competition.
Second, “California courts will protect an employer from the misappropriation of its trade secrets by anyone, including its former employees.” The Court noted that customer lists can be trade secrets, and courts may act to protect employers from former employees who misappropriate such trade secrets.
“Thus, 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 concluded (emphasis in original). “[S]ection 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business,” the Court explained, “but a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer.”
Applying these principles, the Court of Appeal vacated the challenged portion of the injunction for two reasons. First, it was as broad as the contractual non-solicitation clause at issue in Edwards that was held unenforceable. Thus, it was unenforceable here.
Second, although injunctions designed to have the limited effect of protecting against trade secret misappropriation are appropriate, the first unchallenged category of the injunction already offered such protection by prohibiting the defendants from using TRG information found on its databases, including customer information. Therefore, the second category went too far.
While an employee’s right to compete against a former employer’s business may be protected by the courts, employers, however, may increase the likelihood of trade secret protection by taking reasonable measures to keep confidential their customer lists and other sensitive information.
Jackson Lewis attorneys are available to assist employers with trade secrets, non-competes and other workplace laws.
©2008 One Solution Human Resources All rights reserved.
- News & Events
- General HR
- Handbooks
- Benefits
- Risk Management
- Contact Us
