California is well-known for enforcing non-compete provisions only under narrowly-defined circumstances. A recent case in the United States District Court for the Northern District of California (Richmond Technologies v. Aumtech Business Solutions) illustrates that protection of trade secrets can be one of those circumstances.

Jennifer Polito, a former employee of plaintiff Richmond Technologies (which does business as ePayware), started working for defendant Aumtech. ePayware brought suit, alleging that Ms. Polito misappropriated ePayware’s source code, license keys and customer list to help Aumtech compete against ePayware.

Previously, ePayware and Aumtech had entered into a Confidentiality and Non-Disclosure Agreement that contained a provision by which Aumtech agreed not to compete with ePayware “with similar product and or Service using its technology” for a period of one year.

The court noted that, in various cases, California courts have held that trade secret protection may be seen either as an exception permitting enforcement of a non-compete provision or, alternatively, as the basis for an action based on tort or unfair competition law.

Accordingly, the court held that the NDA clause prohibiting use of confidential information is likely enforceable to the extent that the claimed confidential information is protectable as a trade secret. Furthermore, the court found that plaintiff likely would suffer irreparable harm in the absence of a temporary restraining order (TRO).

As a result, the court ordered the following narrowly-defined TRO:, which illustrates the enforceable boundaries of a trade secret-base non-compete provision:

(1) After Plaintiff deposits $20,000 with the Court as bond, Defendants shall turn over all of the current source code and license keys developed for ePayware clients that have not yet been released to Plaintiff.

(2) Defendants are temporarily enjoined from listing current ePayware customers on the Aumtech America website in a manner that suggests those customers are Aumtech America customers.

(3) Defendants are temporarily enjoined from initiating contact with current ePayware customers or clients regarding Aumtech America’s enterprise resource planning software, unless none of the Defendants had knowledge of or contact with those customers during their terms of employment with ePayware. However, Defendants may engage in marketing efforts directed at the merchant services market as a whole, such as attending trade shows.

(4) Defendants are temporarily enjoined from using ePayware’s information about its customers’ technical and business requirements, or other confidential client information, to solicit or obtain agreements with those customers. However, Defendants may enter into agreements with ePayware’s customers if the customer initiates the contact and none of ePayware’s confidential information will be used in negotiating, executing, or performing the agreement.

(5) Defendants are temporarily enjoined from using any of ePayware’s source codes, software, methods, techniques, or other trade secret information in Aumtech America’s products or services. However, Defendants may provide and market similar, competing products and services, so long as none of ePayware’s trade secrets are used in those products or services.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

California courts are known for not enforcing non-compete provisions except under narrowly-defined circumstances (see “California doesn’t *always* prohibit non-compete provisions”). In a case last year (Silguero v. Creteguard, Inc.), the Court of Appeal for the Second District held that an employer may not terminate an employee because of another company’s unenforceable non-compete agreement.

In 2003, Rosemary Silguero began working for Floor Seal Technology, Inc. (“FST”). In 2007, FST threatened Silguero with termination if she did not sign a confidentiality agreement that included an 18-month post-employment non-compete provision. Two months later, FST fired her.

Soon thereafter, Silguero started working for Creteguard. However, when FST asked Creteguard to respect the non-compete provision, Creteguard terminated her employment. In a letter, Creteguard’s CEO wrote that “although we believe that non-compete clauses are not legally enforceable here in California, [Creteguard] would like to keep the same respect and understanding with colleagues in the same industry.”

Silguero brought suit alleging wrongful termination in that, while at-will employment can be terminated for almost any reason, it cannot be terminated for a reason that is against public policy, and her non-compete clause was against public policy. The court held that Silguero’s position concerning California law is correct.

This case raises at least two important issues for California employers:

• First, except in situations where California law expressly authorizes non-compete provisions, employees should not be forced to agree to such provisions. In forcing Silguero to to agree to such a provision only two months before terminating her employment, FST’s behavior was particularly egregious.
• Second, an  employer should not enforce another company’s non-compete provision unless the employer is sure that the provision is enforceable – and even then, the employer should tread carefully. In firing Silguero for violating a provision that it knew was unenforceable, Creteguard’s behavior was particularly imprudent.

Photo credit: iStockphoto

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

California is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo.

Business and Professions Code Section 16601 says, to oversimplify a bit, that anyone who sells his entire ownership interest in a partnership, limited liability company (LLC) or corporation may agree not to compete with the entity in the geographic area where it operates so long as the buyer, or a successor, continues to operate the business. Sections 16602 and 16602.5 provide similarly in the event that a partnership or LLC dissolves, or a partner disassociates from a partnership, or a member withdraws from an LLC.

The rationale: The buyer / new owner of an interest in a business should have an opportunity to make the business a success without being undermined by the seller / former owner.

Practical tip: When you buy a business, it’s OK – even prudent – to put restrictions on the seller’s ability to compete with you…even in California.

Related post: Non-compete Snares Conspiring Employer

Photo credit: stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., et al., case number 07-cv-05248, the U.S. District Court for the Northern District of California held that such a provision is unlawful under California Business and Professions Code Sections 16600 (which pertains to restraints on engaging in a lawful profession, trade, or business) and 17200 (which pertains to unfair competition).

Prudent California employers now should make sure that any post-employment provisions in proprietary rights agreements:

• Do not include automatic assignment of any post-employment inventions
• Limit provisions concerning post-employment inventions to those inventions that were conceived during the employment period based on the employer’s confidential information

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Although Acquirer’s proposed employment agreement generally was acceptable, Founder was concerned about its non-compete provision. That provision stated that for one year following termination of his employment, Founder would not “engage in any business activities that are competitive with the business activities of [Acquirer] or those of its subsidiary or parent companies”. The problem was that the business of Acquirer and its affiliates was so vast, and Founder’s expertise was so industry-specific, that the provision would have limited Founder’s ability to be employed elsewhere.

Acquirer’s General Counsel stated that the non-compete provision was non-negotiable - if founder did not accept that provision, the acquisition would not take place. In addition, the GC said that even though Founder lived in California and would be working at Acquirer’s offices in California, the provision stating that the agreement would be “governed by and construed in accordance with the laws of the State of New York” also was non-negotiable.

A New York choice of law was potentially bad news for Founder. New York will enforce a non-compete provision if it is no greater than is required for the protection of the legitimate interest of the employer, does not impose undue hardship on the employee, and is not injurious to the public; furthermore, New York courts are willing to narrow an overly broad non-compete provision to make it enforceable rather than invalidate it entirely. BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999)

California, in contrast, generally is hostile to non-compete agreements. Though subject to certain exceptions, California Business & Professions Code Section 16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void”. If California law were to apply, Acquirer’s post-employment non-compete provision would not be enforceable. I looked for a way to bring California law in through the back door.

The agreement stated that any suit relating to the agreement must be brought in New York. I told the General Counsel it was bad enough that the economic disparity between Acquirer and Founder would provide Founder little ability to prevail in any suit against Acquirer; requiring Founder to litigate in New York, more than 2,500 miles away, would make it almost impossible for Founder to adequately protect his interests.

I requested that we change that provision to specify that suits must be brought in San Francisco. The GC agreed, so long as New York law still applied. I accepted that requirement, because I knew California courts consider Section 16600 such an important part of public policy that they will enforce its prohibition of a non-compete clause even if the agreement specifies that the law of another state will govern! Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App.4th 881 (1998). I don’t know whether the GC was aware of this point, but that was not my concern. Founder was pleased, the parties signed the agreement, and Founder remains an employee of Acquirer.

I am sharing this story because it offers the following lessons:

• Sometimes a choice-of-law provision matters.
• Sometimes applicable law will override a contractual choice-of-law provision.
• Sometimes you don’t know whether the other party to a negotiation fully appreciates the significance of his concession, but the best course is to accept the concession and move forward.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.