Labor Employment Law Blog

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).