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Attorneys

Another Non-Compete Held Unenforceable

February 18 2014

By James Kachmar

Under California law, non-compete provisions with an employee are generally unenforceable.  Statutory exceptions to this rule include the seller of a business’s goodwill or a membership interest in an LLC.  Courts have also recognized a judicial exception to this rule: where the non-compete is necessary to protect an employer’s trade secret information.  This judicial exception seeks to balance the tension that exists between an employee’s right to mobility versus the employer’s need to protect its valuable business information.

A recent decision from a federal district court in the Northern District of California shows what a fine line it is between permissible and impermissible non-competes.  In Sunbelt Rentals, Inc. v. Victor, 2014 U.S. Dist. LEXIS 14416, a company that operated rental centers sought a preliminary injunction against one of its former employees who had joined a competing company.  In addition to alleging a claim for trade secret misappropriation, Sunbelt accused Victor of breaching his employment agreement which contained a non-compete/non-solicitation provision.  The provision at issue was an agreement by the employee that he would not solicit any customer “who purchased or leased products or services from [Sunbelt] at any time during the 12 calendar months immediately preceding the termination of this agreement for any reason and for or with whom employee had contact, responsibility or access to confidential information related to” the customer.  Sunbelt argued that Victor had breached this provision of his agreement and thus, was entitled to injunctive relief against Victor.

Victor opposed the motion for preliminary injunction by arguing that the “non-compete” provision in his employment agreement was unenforceable under section 16600 of the California Business and Professions Code.  The Court began by recognizing that under this section “covenants not to compete are generally unenforceable” and that this section “represents a strong public policy” of California.  The Court continued by recognizing the three statutory exceptions to 16600 as well as the judicially-created rule that such provisions are not necessarily invalid when “necessary to protect trade secrets.”

Sunbelt attempted to argue that the “non-compete” was enforceable because it only sought to prevent its former employees “from using Sunbelt’s confidential information to solicit Sunbelt’s customers.”  The Court rejected this argument finding that the subject provision was much broader.  The Court noted that it prevented the solicitation of any customers who had done business with Sunbelt during the preceding 12 months, even if that customer was no longer doing business with Sunbelt.  Further, the Court found that the provision would apply if Sunbelt could show that its former employee merely had access to confidential information, not that the former employee had used such information to make the solicitation.

Given this, the Court found that the subject “non-compete” provision went too far and was thus unenforceable under section 16600.  (The Court did find that a contractual provision preventing the former employee from soliciting his former coworkers was, at least at the preliminary injunction stage, valid.)

The Sunbelt opinion once again demonstrates the high level of scrutiny courts apply when an employer accuses a former employee of violating a non-compete contractual provision.  Great care must be exercised in preparing such provisions to ensure that they do not run afoul of section 16600.  Should a court invalidate such a provision, the employer may be left with having to carry a heavier burden to establish that the employee has misappropriated trade secret information in order to prevent the unfair competition.