EBG Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

* Co-authored by Kathryn T. McGuigan.

In the recent case of Dowell v. Biosense Webster, Inc., No.B201439, the California Court of Appeal stated in dicta that it doubted the continued viability of the common law trade secret exception to covenants not to compete. The Dowell Court left open the question as to whether or to what extent courts will enforce agreements to protect trade secrets.

On January 29, 2010, in an unpublished opinion, Majestic Marketing, Inc. v. Nay, No. E047085 (Fourth District, Division Two), at least one California Court of Appeal appears to have recognized the viability of the trade secret exception to California Business & Professions Code ¶16600 prohibition of employee non-competition agreements.

The Majestic Marketing employee handbook included a clause which, among other things, identified company trade secrets and prohibited employees from using those trade secrets. Majestic brought suit against two former employees claiming that while they were still employed and after, the employees had misappropriated trade secrets (customer lists), in violation of the clause to form another company. The trial court entered a preliminary injunction prohibiting the defendant employees from using any Majestic customer information and barred them from doing business with about 3,000 Majestic customers for the two-year prohibition period contained in the employee handbook. The employees were also required to return all Majestic information and property. The Court of Appeal affirmed.

The Court agreed with the trial court that Majestic’s customer information was a protectable trade secret as defined under the clause in Majestic’s handbook and stated that “[d]espite California’s broad prohibition against noncompetition agreements, covenants not to compete may be enforced to the extent that enforcement is necessary to protect a company’s trade secrets.”

The Majestic Court decision therefore gives some indication that the trade secret exception may operate where the employer can establish that the information at issue is a trade secret. However, the California Supreme Court has yet to weigh in and for now, the viability of the trade secret exception remains an open issue.
 

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* Co-authored with Kathryn T. McGuigan.

In Edwards v. Arthur Andersen, LLP, 44 Cal.App. 4th 937 (2008) the California Supreme Court adopted an expansive interpretation of California Business & Professions Code §16600, holding that §16600 prohibits employee non-competition agreements unless the agreement falls within a statutory exception which are non-competition agreements associated with certain business sales transactions, dissolution of partnerships, or termination of a member’s interest in a limited liability company. The Edwards Court specifically rejected the “narrow restraint” exception adopted by the Ninth Circuit and which no California court had endorsed, finding that even limited restraints on post-termination competition are unlawful under California law.

However, the Court was careful to note that its opinion did not invalidate restraints necessary to protect trade secrets, stating that it was not required to address the applicability of the so-called trade secret exception to section 16600 because it was not germane to the claims raised by the employee. Edwards, supra, 44 Cal.4th at 946, fn. 4.

On November 19, 2009, the California Court of Appeal in Dowell v. Biosense Webster, Inc., No. B201439, in refusing to enforce broad and expansive noncompete and nonsolicitation clauses in employment agreements, did not reach the trade secret exception issue either. The Dowell Court stated in dicta that it doubted the continued viability of the common law trade secret exception to covenants not to compete, but was not resolving the issue because the noncompete and nonsolicitation clauses in the agreements before it were not narrowly tailored or carefully limited to the protection of trade secrets, but were so broadly worded as to restrain competition. The Dowell Court left open the question as to whether or to what extent courts will enforce agreements more narrowly tailored to protect trade secrets.

Even if a court does not enforce a nonsolicitation covenant tethered to even a narrow definition of trade secrets, an employer will still have protection under common law and the California Trade Secrets Act if the employee is using trade secret information to solicit. Given the direction that the California courts appear to be headed, however, employers in California should weigh the value of including any nonsolicitation covenant against the risk created by the inclusion of such a covenant, which may violate public policy.
 

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