Labor Employment Law Blog

By Gregg Fisch and Danielle Levine

On April 24, 2013, a federal jury in the Northern District of California found former Korn/Ferry International corporate executive recruiter, David Nosal, guilty on six counts of conspiracy, stealing trade secrets, and violations of the Computer Fraud and Abuse Act (“CFAA”). An appeal is expected, however.

By Jennifer Redmond and Suzanna Winslow

Wanke v. Superior Court of San Diego, Cal. Ct. of App., Fourth Dist., Div. One, Case Nos. D058825, D058669 (October 4, 2012)

On October 4, 2012, the Fourth District Court of Appeal upheld a stipulated injunction which the trial court had concluded was an unlawful business restraint in violation of the law barring non-competition agreements, California Business & Professions Code section 16600. In so holding, the appellate court determined that a facially-valid injunction may be deemed invalid only if the challenging party can show that the injunction was beyond the trial court’s jurisdiction to issue from the outset.

By Jennifer Redmond and Jonathan Sokolowski

The California Court of Appeal for the Fourth District recently refused to enforce a covenant not to compete against the former employee and selling shareholder of a video game company. In Fillpoint, LLC, v. Maas et al., Case No. G045057, 2012 Cal. App. LEXIS 914 (Cal. Ct. App. Aug. 24, 2012), the Court of Appeal determined that half of a two-part noncompete agreement entered into in the context of the sale of a business was unenforceable, despite the exception for such covenants found in Business and Professions Code Section 16601 (“Section 16601”). This case answers what had previously been an open question under California law: Whether an acquiring company can obtain a non-compete that begins to run upon termination of employment (as opposed to or in addition to a non-compete that begins to run upon closing) from a shareholder who becomes an employee of the buyer. See Hilb, Rogal & Hamilton Ins. Servs. v. Robb, 33 Cal. App. 4th 1812 (1995) (enforcing a noncompete agreement against a selling shareholder that commenced at termination of employment, without any discussion or analysis of whether using termination of employment as the trigger for a noncompete violates Section 16601).

By Nick Schnermann

On November 4, 2011, the Virginia Supreme Court issued a decision in Home Paramount Pest Control Cos. v. Shaffer, in which the Court found a covenant not to compete in an employment agreement to be overbroad and unenforceable. In so doing, the Court overruled its own 1989 decision in Paramount Pest Control Co. v. Rector, which upheld a virtually identical agreement. Coincidentally, Home Paramount (the losing party in this new case) is the successor in interest to Paramount Pest Control, the prevailing party in the 1989 case.

By Jonathan Sokolowski & Eric Raphan

On August 19, 2011, in Eyes of the World v. Boci, No. CV 46549/09 (N.Y. Civ. Ct. Aug. 19, 2011), Judge Margaret A. Chan held that a former employee’s restrictive covenant prohibiting her from providing salon services to any client of her former employer for whom she provided such services during the last 12 months of her employment was overly broad and, thus, unenforceable.

A California Court of Appeal has recently held that a subsequent employer can be liable for wrongful termination in violation of public policy for firing a new employee when her prior employer attempted to enforce an unenforceable non-compete agreement.

In Pacesetter, Inc. v. Biosense Webster, Inc., the California Court of Appeal for the Second Appellate District found that a non-competition clause contained in Biosense Webster, Inc.’s (“Biosense”) Employee Secrecy, Non-Competition and Non-Solicitation Agreements (“Agreements”) was void as a matter of law under Section 16600 of the California Business and Professions Code (“Code”)(California's prohibition against restraint of trade) and that its use violated Section 17200 of the Code (California’s Unfair Competition Law). Biosense attempted to argue that the non-competition clause was enforceable because it fell under the so-called trade secret exception to covenants not to compete. This argument was rejected by the court, however, because the clause was not narrowly tailored to protect trade secrets.

A recent ruling by the U.S. District Court for the Northern District of California provides important insight for employers in how to properly draft intellectual property assignment provisions that comply with California law.

In World Financial Group, Inc. v. HBW Insurance & Financial Services, Inc. the California Court of Appeal for the Second Appellate District rejected an Anti-SLAPP motion to strike in a breach of contract, theft of trade secrets, and unfair competition case. The defendants moved to strike the complaint under California's Anti-SLAPP statute, claiming that their activities in soliciting the customers and employees of their previous employer were protected speech involving a "matter of public interest," namely their pursuit of employment under the public policies expressed in California Business and Professions Code section 16600 (California's prohibition against restraint of trade). The court upheld the trial court's denial of the motion, finding that solicitation of customers in a business context was not protected activity for the purposes of the anti-SLAPP statute.

Click here for a PDF copy of the document.

In Edwards v. Arthur Andersen LLP, the California Supreme Court reaffirmed California's strong public policy against covenants not to compete.  The primary issue in the case was whether the Ninth Circuit's "narrow restraint" exception was a proper interpretation of California law.  Under the narrow restraint exception, employers could enforce non-competition agreements that did not "entirely preclude" an employee from practicing his or her trade.  The Supreme Court summarily rejected this exception.  The lesson for employers is that unless a covenant not to compete falls squarely within one of the statutory exceptions, it is not likely to be upheld by a California court.

Click here to view a PDF copy of the document.

It is well established that covenants not to compete are generally unenforceable in California. The Fourth District Court of Appeal's opinion issued on Monday in Strategix, Ltd. v. Infocrossing West, Inc., however, involves one of the few exceptions making non-competes enforceable (wherein the provision is entered into as part of the sale of a business), and even restricts that.  In Strategix, Ltd. v. Infocrossing West, Inc., the Fourth District, without explanation or other discussion, lumped together the issue of the enforceability of covenants not to solicit employees with covenants not to solicit customers.  Strategix, Ltd. v. Infocrossing West, Inc., No. G036177 (Cal. App. 4 Dist./Div. 3) (9/11/06). This opinion is misleading and will likely cause confusion in the future as to the correct standard for each, as there has always been much more leeway for non-solicitation of employees provisions than there has been for non-solicitation of customers provisions.

The Second District Court of Appeal in Los Angeles issued a significant opinion last week, finding that non-compete agreements in California employment contracts are impermissible. In Edwards v. Arthur Andersen LLP, the Second District explicitly rejected decades of prior decisions –  many of them in federal courts – which had found such agreements to be permissible if they were narrowly crafted so that an employee who left a company still could work in his or her profession. The Court of Appeal’s decision makes clear that such agreements are generally invalid and employees cannot be compelled to sign them as a condition of employment. Edwards v. Arthur Andersen LLP, No. B178246 (Cal.App. 2 Dist./Div. 3) (8/30/06).