Employment Law Commentary

How Far Can Employers Go To Protect Their Trade Secrets And Other Proprietary Information?

Over the past few months, employers have been creating more jobs and hiring more employees. With more employment opportunities available, employees are more mobile than they have been in recent years. However, as employee mobility increases, so do employer concerns about the possible disclosure of trade secrets when employees leave to join other companies.

To address these concerns, many employers outside California rely on post-termination restrictive covenants that restrict employees' competitive activities. California employers, however, have much less discretion when it comes to restricting an employee's post-employment competitive activities. This Commentary explores the options available to California employers in restricting an employee's post-employment activities.

Business And Professions Code Section 16600 Prohibits Restraints On Trade, Unless Necessary To Protect Trade Secrets

It is well established that covenants not to compete are generally unenforceable in California. California Business & Professions Code Section 16600 ("Section 16600") provides " every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." This notion is reinforced by two recent California Court of Appeal decisions, Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425, 1428 (2003) and D'Sa v. Playhut, Inc., 85 Cal. App. 4th 927, 934 (2000).1 These two decisions not only reaffirm California's fundamental public policy against restrictive covenants, but also state that employers may be held liable for wrongful termination if they terminate an employee who refuses to sign an unenforceable restrictive covenant.

There are a few exceptions to Section 16600's broad prohibition of non-competition agreements. For example, non-competition agreements may be valid if they are obtained in connection with the sale of a business or the dissolution of a partnership. Cal. Bus. & Prof. Code ǧ 16601, 16602. In addition, California courts have created an exception that permits the enforcement of non-competition agreements, when necessary to protect an employer's trade secrets. Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 859 (1994); Muggill v. Reuben H. Donnelley Corp., 62 Cal. 2d 239, 242 (1965). This exception, however, is not as expansive as many employers would like, since it can only be used to protect trade secrets.

One common misconception among many employers is that "trade secret" includes all the information encompassed within the definition of proprietary and confidential information as those terms are broadly defined in standard non-disclosure agreements. On the contrary, by statute, a trade secret is more narrowly defined. A trade secret must derive "independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use" and be "the subject of efforts that are reasonable under the circumstances to maintain its secrecy." California Civil Code 3426.1(d). For example, customer lists that contain information not readily available to competitors through general sources have been found to be trade secrets by California courts. See MAI Syst. Corp. v. Peak Computer Inc., 991 F.2d 511, 521 (1993); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (1997); American Paper & Packaging Prods., Inc. v. Kirgan, 183 Cal. App. 3d 1318, 1325 (1986). Conversely, employees' talents, qualities, and characteristics are not considered trade secrets. Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 861-62 (1994).

Even if the information is clearly a trade secret, proving that a former employee has disclosed trade secrets to a new employer can be difficult. Some federal courts outside California have adopted a theory commonly referred to as the "inevitable disclosure" doctrine. Under this doctrine, the former employer need not show that trade secret information has actually been disclosed, but rather, that the new position would necessarily require the former employee to rely on trade secret information. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). In those jurisdictions in which the doctrine has been adopted, employers have successfully relied on it to...