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 general standard in California is that customer non-solicitation provisions are enforceable only to the extent necessary to protect an employer’s legitimate trade secrets. There is a drastic difference, however, in the standard for employee non-solicitation provisions. California courts generally regard employee non-solicitation provisions as enforceable and a competitor is not precluded from voluntarily restricting its ability to solicit another’s employees. The reason for such a distinction in standards between employees and customers from a public policy standpoint is that with such a provision there are no restraints on the freedom of individuals to seek and pursue employment, it simply prevents a competitor from soliciting the employee.
In Strategix, the seller, Strategix, sold its goodwill and substantially all of its assets to the buyer, Infocrossing. The parties’ agreement contained a nonsolicitation agreement barring the seller from soliciting all of the buyer’s employees and customers for one year. The Fourth District held that the nonsolicitation provision barring the seller from soliciting all of the buyer’s employees or customers was overbroad and uneforceable. Additionally, the Court declined to rewrite the covenants and limit their scope. The court, adding another restriction to the enforceability of nonsolicitation provisions held that "[c]ourts may enforce nonsolicitation covenants barring the seller from soliciting the sold business’s employees and customers….. On the other hand, nonsolicitation covenants barring the seller from soliciting all employees and customers of the buyer, even those who were not former employees or customers of the sold business" are unenforceable."
This is yet another example of the ongoing effort by California courts to restrict covenants not to compete, this time by narrowing the main exception.