Non-Compete Clauses vs. California’s Trade Secret Protection Act

Posting on Facebook can get you firedA covenant not to compete (also known as a non-compete clause ), is a provision included in many employment contracts that restrict an employee’s ability to work  for another company in the same industry for a certain period of time. Employees (particularly those in high level positions) often gain intimate knowledge about the inner workings of a company, including its products, customers, and methods of doing business.  If such an employee is terminated or resigns and takes a job with a competitor (or starts their own competing business), employers are naturally concerned that the ex-employee will use the company’s confidential information to gain a competitive advantage, and therefore use non-compete clauses to prevent this from happening.

The majority of U.S. states permit and enforce non-compete clauses, viewing them as a legitimate means of protecting proprietary information and preventing unfair competition.  California sees things differently.  For the most part, non-compete agreements are automatically void as a matter of law in California, except in certain limited circumstances.  California law has long viewed non-compete clauses as against public policy, in that they represent an unreasonable restriction on a person’s right to earn a living in his or her chosen profession.

In fact, California’s interest in protecting its citizens against the restrictive nature of non-compete clauses even extends to those situations in which Californians enter into an employment agreement with a company located in a state that recognizes non-compete agreements.  In the recent case of  Arkley v. Aon Risk Services Companies, Inc., (Case No. 2:12-cv-01966-DSF-RZ), three former employees of an Illinois company filed suit in California to prevent the enforcement of a non-compete clause in an employment agreement that was to be governed by Illinois law.  The employees, who worked in California both before and after their employment with the Defendant, prevailed, based on California’s “strong policy interest” in employee mobility, which, the Court stated, outweighed Illinois’ stated interest of fostering predictability for companies.

So what can a California company do to protect its confidential information from falling into the hands of a competitor?   Look to the California Uniform Trade Secrets Act (“UTSA”), a statute that offers powerful protection for  such information.  Under UTSA, if a company takes reasonable measures to protect information such as customer lists, marketing plans, and methods of doing business, and if the information is valuable because it is kept secret, California courts will recognize that information may constitute trade secrets.

Employees need not abscond with a thumb drive full of trade secrets in order for an employer to take advantage of UTSA.   In fact,  UTSA actually affords protection to the contents of an employee’s memory, if the information fits the definition of a trade secret.  A former employer need only show that its employee used or disclosed his or her memories of a trade secret to prove that a misappropriation occurred.  For example, an employer may satisfy this requirement by showing that the former employee used a sales pitch similar to the company’s when soliciting the same customers.

An Employer’s Liability for Unauthorized Use of Trade Secrets

It is important for California employers to know that if they hire the former employee of a competitor, they may also face a misappropriation claim under UTSA, regardless of whether they have actual knowledge that confidential information is being used unlawfully.  This is due to the fact that, under UTSA, the standard is not actual knowledge of wrongdoing, but merely constructive knowledge.  If company management knew or should have known that its new employee was taking advantage of another company’s trade secret information, liability may attach.

Guidelines for Protecting Trade Secrets

A non-compete clause will not protect a California company against unauthorized use of its confidential information by a former employee.  In order for California employers to limit their employees’ use of confidential information after they leave the company, management  should take the following steps:

  • Include strong confidentiality and trade secret provisions in all employment agreements.  
  • Make certain your employment agreements define trade secrets as widely as possible (i.e., “any and all information pertaining to the company that is not known by the general public…”).
  • Incorporate policies designed to protect confidential information.  Require documents to be shredded, and track e-mail and computer use.  
  • Remind employees of their contractual obligation not to disclose or use the company’s confidential information and trade secrets when they leave the company. 
  • Inform new employees (in writing) that they are not to use or disclose any information they may have learned about their former employer.  You might want to consider making this grounds for termination.   

Despite the fact that California law doesn’t recognize or enforce non-compete agreements, California employees can still restrict the use of their confidential information by taking advantage of the protections offered by California’s Uniform Trade Secrets Act.  In many ways, UTSA provides even more powerful protection than any non-compete clause.

 



Author: Seth Heyman
Seth D. Heyman is a California attorney with extensive experience in advertising and marketing law, corporate law, contracts, governmental regulations, international business, and Internet law. He has counseled numerous successful companies, both public and private, and was responsible for regulatory compliance, contract management, corporate governance, and HR best practices for multiple organizations in many diverse industries, including marketing, telecommunications, energy, and technology development. He offers insight and guidance on federal and state direct mail, TV, radio, telemarketing, and Internet marketing laws, as well as online promotions, Internet privacy, data protection regulations, and similar matters.

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