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Non-Competition Clauses and Trade Secrets

On Behalf of | Aug 7, 2015 | Business Litigation

One of the most common business litigation issues that Buffington Law Firm’s Orange County business trial attorneys are often asked to deal with concerns non-competition clauses and trade secret issues.  The scenario usually goes like this.  An employee, often a high level salesperson or executive, is ending his employment to go work for a competitor.  His now-former employer required him to sign a non-competition clause in his employment agreement.  The salesperson has detailed knowledge of the former employer’s customers in terms of their identity, preferences, buying patterns, etc.  Is it legal for this salesperson to immediately quit and go to work for a direct competitor.

Yes, it is.  In California, unless the sale of a business is involved, which it is not in this common fact pattern, non-competition clauses are unenforceable.  This is provided for in California Business & Professions Code Section 16600 et seq. Companies sometimes try to get around this rule by providing in the employment contract that some other state’s laws will govern the contract.  It doesn’t matter. California law will control so long as the new job is in California and the non-competition clause is a nullity, as far as California courts and lawsuits are concerned.

So far this sounds pretty good for the salesperson.  He or she is free to seek out new employment.  But there is one very significant pitfall.  California law also recognizes that an employer’s customer list may (or may not) constitute the employer’s confidential information or trade secret.  In other words, California law may regard a customer list as the actual property of the employer.  If an employee exits the firm and uses this “customer list” to compete against his or her former employer, this may be actionable in court as unfair competition and misappropriation.

Courts have struggled for decades determining when a “customer list” actually constitutes property and when it does not.  These determinations are acknowledged by courts to be “fact driven” and not a black-and-white issue in many cases.  Courts consider many factors including the following in determining whether a customer list or similar information constitutes a trade secret:

  • Is the information the subject of reasonable efforts to protect its secrecy;
  • Does the owner derive an independent economic benefit by virtue of this information;
  • The difficulty in compiling the information — whether it is easily obtainable in the marketplace or involved effort and expense to compile.

A thorough analysis of when a customer list or other intangible information is a trade secret and when it is not, is beyond the scope of this Blog article.  The key to take away is that the determination is often not easy to make.  Another key fact is that this means that companies can usually maintain a lawsuit to sue a departing company, and possibly the new employer, if they have evidence that the former employee took their customer list or other (alleged) proprietary confidential information.

If you are involved in a situation involving allegations of unfair competition, including a scenario similar to that discussed in this short Blog article, we invite you to call Buffington Law Firm for a free legal consultation.  In this meeting you will speak to an experienced business litigation attorney to discuss the protection of your rights.