Restrictive Covenants

Does California’s Ban on Non-Competes Apply to Business Agreements? The California Supreme Court May Weigh In Shortly.

The Ninth Circuit recently certified a question to the California Supreme Court regarding the scope of California Business & Professions Code Section 16600.  As TSW readers are likely aware, Section 16600 states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  Pursuant to this statute, California courts have struck down a number of restrictive covenants in contracts with employees in California, including non-compete provisions, customer non-solicit provisions, and certain employee non-solicit provisions.  The Ninth Circuit now wants to know whether the statute should apply to an agreement between two businesses.  The Supreme Court’s answer may have significant effects on business agreements and collaborations in or involving California. READ MORE

Use of Out-of-State Restrictive Covenants Ending Quickly in California

Two years ago, TSW reported on several cases in which corporations outside of California successfully enforced non-compete agreements against California employees.  They did so by using employment agreements containing foreign choice-of-law provisions and foreign forum-selection provisions.

We also reported that California had taken measures to correct this “loophole” by enacting California Labor Code section 925.  Section 925, which went into effect on January 1, 2017, forbids employers from requiring employees to agree to foreign forum-selection and choice-of-law provisions as a condition of employment.  It only applies to employees who primarily reside and work in California and who were not represented by counsel in negotiating the forum-selection or choice-of-law provisions.  Its application is also restricted to contracts that have been “entered into, modified, or extended on or after January 1, 2017.”

At the time of our prior article, California courts had yet to apply the statute.  In light of recent inquiries and requests from TSW readers, however, we’ve decide to provide an update on section 925 and its application.

As expected, courts have refused to apply section 925 when considering older contracts that have not been recently modified.  See e.g., Scales v. Badger Daylighting Corp., No. 117CV00222DADJLT, 2017 WL 2379933, at *1 (E.D. Cal. June 1, 2017) (declining to apply section 925 to pre-2017 contract).  The statute, by its own terms, does not affect such contracts, and California Courts have specifically rejected an argument that section 925 evidences California Public Policy that should retroactively reach pre-2017 contracts.  Ryze Claim Sols. LLC v. Superior Court, 33 Cal. App. 5th 1066, 1072 (2019) (reversing “trial court’s decision to apply the policy expressed in Labor Code section 925 to [the employment agreement at issue], which was not entered into, modified, or extended on or after January 1, 2017.”)

It also comes as no surprise that courts have cited to section 925 in deciding not to enforce foreign forum-selection and choice-of-law provisions.  See Depuy Synthes Sales Inc. v. Stryker Corp., No. EDCV181557FMOKKX, 2019 WL 1601384 (C.D. Cal. Feb. 5, 2019) (declining to enforce form-selection and choice-of-law provisions and denying defendant’s motion to transfer action to the District of New Jersey).  In other words, the law appears to be working as intended.

Much of the litigation in this area has involved disputes about whether an older contract has been sufficiently “modified” or “extended” after January 1, 2017 such that it falls within the purview of section 925.

In Yates v. Norsk Titanium US, Inc., No. SACV1701089AGSKX, 2017 WL 8232188, at *3 (C.D. Cal. Sept. 20, 2017), the court found that section 925 did not apply to a pre-2017 contract and thus upheld the contract’s forum-selection clause and granted the motion to transfer.  The employee argued that section 925 should apply to the contract because it had been modified through an “implied-in-fact” modification after January 1, 2017.  The Court rejected this argument because the contract expressly stated that any amendment must be “in a writing signed and dated by both parties.”

Subsequent cases, in contrast, have generally applied section 925 when certain changes to the employee’s employment occurs (e.g., a change in compensation structure).  See e.g., Geoffrey Friedman, et al. v. Glob. Payments Inc., et al., No. CV183038FMOFFMX, 2019 WL 1718690, at *3 (C.D. Cal. Feb. 5, 2019) (applying section 925 to a pre-2017 contract because the employer modified the “Sales Policy Manual” after January 1, 2017 thereby affecting the employees compensation); Lyon v. Neustar, Inc., No. 219CV00371KJMKJN, 2019 WL 1978802, at *7 (E.D. Cal. May 3, 2019) (applying section 925 to a pre-2017 employment agreement because the employee signed a separation agreement when he left that modified the prior employment agreement).

Accordingly, while certain older and unmodified contracts may remain effective, the number of such contracts is shrinking quickly.  In some cases, the courts appear to be applying section 925 aggressively to sweep in older contracts that have even minor modifications after January 1, 2017.

Another California Court Raises Doubts on Employee Non-Solicitation Provisions

Last November, we discussed the potential impact of a recent California appellate court decision, AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018), which called into question long-standing California precedent enforcing certain employee non-solicitation provisions.  However, we noted it was too soon to forecast the implications of that case.

Though it is still early, it appears the tide may be turning, as a California federal district court recently issued a decision that relied upon AMN’s holding and found that the employee non-solicitation provision in the plaintiff’s contract was unenforceable under California law.

READ MORE

Employee Non-Solicitation and No-Hire Covenants? What’s the Scoop, California?

The law in California is well settled that, with few exceptions, non-compete agreements are unenforceable.  Less clear is whether and to what extent employee non-solicitation and no-hire agreements can withstand a court’s scrutiny.  These types of agreements often exist between employers and employees, as well as between employers themselves.  And while non-solicitation provisions containing broad language prohibiting direct or indirect solicitation are common, there is significant confusion over the extent of their enforceability in California.  Are these agreements enforceable?  As is often the case, the answer is “it depends.”  Fortunately, there are a handful of published appellate cases highlighting the fine distinctions that guide the analysis: READ MORE

Pushing the Envelope: Eight Circuit Seals the Fate of Envelope Company’s Trade Secret Claims

On December 8, 2017, the Eighth Circuit rejected trade secrets and other claims related to allegedly stolen customer lists.  Applying Missouri state law, the federal appellate court continued the Show-Me State’s tradition of looking at customer list trade secrets with a jaundiced eye. READ MORE

Courts Continue to Enforce Foreign Non-Competes in California While the Window for Such Agreements Slowly Closes

Contrary to common perception, California employees who signed restrictive covenants prior to January 1, 2017 are not completely immune to enforcement of all restrictions on competition. For the second time in several years, a foreign corporation, Synthes, Inc., successfully enforced a non-competition agreement against former employees who were California residents. In the most recent case, the U.S. District Court for the Eastern District of California, enforced the company’s agreement against a Sacramento resident. READ MORE

THANKSGIVING EDITION [FROM THE ARCHIVES]: Court Protects Quizno’s Franchise Turkey Trade Secrets

This Thanksgiving, Trade Secrets Watch is serving a delicious tale about protecting trade secrets in a franchising relationship.

In 1994, Quizno’s entered into a franchise agreement with Robert Kampendahl, an enterprising fellow who wanted to open up a Quizno’s sandwich shop in St. Charles, Illinois. Unfortunately, Kampendahl didn’t keep his food equipment clean, used unapproved foods, and had safety and sanitation problems, so Quizno’s terminated the franchise agreement. Upon termination, Kampendahl was subject to a covenant not to compete that prohibited him from opening a competing sandwich shop within five miles. READ MORE

Filer Beware! E-Filing Error Can Destroy Trade Secret Status

First rule of thumb in trade secrets litigation? A trade secret must be kept secret. It is painfully obvious, but modern practitioners must not grow complacent due to the convenience of electronic filing. Although trade secrets law does not command absolute secrecy, a recent e-filing snafu in HMS Holdings Corp. v. Arendt offers a cautionary tale from New York on how one botched upload could jeopardize a client’s most prized possession. READ MORE

White House Proposal: Beef Up Anti-Hacking Laws and Resolve a Circuit Split

President Obama wants to go where the Supreme Court refused to tread.  As part of his cybersecurity and privacy initiatives, which we discussed last week, the President would strengthen the federal anti-hacking provisions of the Computer Fraud and Abuse Act (CFAA), including an expansion of activity covered by the statutory phrase “exceeds authorized access.”  In so doing, the President would resolve a circuit split between the First, Fifth, Eighth, Seventh, and Eleventh Circuits, on the one hand, and the Ninth and Fourth Circuits, on the other.  His reason?  “No foreign nation, no hacker, should be able to shut down our networks, steal our trade secrets, or invade the privacy of American families.” READ MORE

Trade Secrets and Third Parties: Litigation Traps To Avoid

Orrick’s Chris Ottenweller and Derek Knerr recently took to Law360 to review recent cases involving theories of third-party liability for trade secret misappropriation.  New employees are one obvious source of potential liability if they bring to the job information obtained from their prior employer. But in recent years companies have also increasingly faced suits based on relationships with contractors and vendors. Chris and Derek offer some practical considerations to help companies mitigate potential liability in the first place.