What Every Business Lawyer Needs to Know about California Employee Non-Compete and Non-Solicitation Agreements By Steven Kesten, Esq. Steven Kesten advises California employers and employees.  www.marincountylegal.com     While speaking to an auditorium filled with hopeful high school students, President Obama recently observed that we are an information based economy. Going forward, said the President, it is the companies and the individuals who possess information vital to modern business that will thrive and survive.  To those of us living in the bay area, the President’s words come as no surprise.  As lawyers, we are often called upon to help our clients retain and protect their trade secrets and other vital information that provides  them with a competitive advantage in the local and global marketplace.   We are also living in an increasingly mobile society. When employees leave their employment, as they frequently do, they walk out the door with a head full of your client’s trade secrets and other information vital to the ongoing success of the business.  A vital question which naturally arises is: How do you protect your client?         If you’ve been confused about how to properly counsel your business client with regard to this important matter, there is little wonder why.  Until 2008 the California Court of Appeals and the Ninth Circuit were not exactly in sync about whether or not a departing employee can directly compete with the business they are leaving.  Whether or not a departing employee could be restrained from soliciting customers or clients and to what degree seemed like a question that had been resolved, but not really.  Beginning nearly 140 years ago, the Civil Code contained a statute rendering void any contract that restrained an individual from engaging in any lawful profession, trade or business. The language of the old statute was guided by fundamental public policy that it is better for the overall economy to allow a departing employee to work or start a business.  This public policy is now expressed in Business & Professions Code § 16600.      Departing employees often start competing businesses and these new enterprises create jobs which, in turn, fuel the California economy. If nothing else, we can’t have the unemployment rolls filled with people who are ready, willing and able to work and would gladly engage in productive activities but for a contract clause prohibiting their employment.   As a friend and colleague recently commented, California hasn’t grown to be the fourth largest economy in the world by preventing its citizens from engaging in gainful employment.  The language of the statute and the philosophy behind the public policy seem clear but, as we know, sometimes there are exceptions to the rule, at least for a while.      Several Ninth Circuit cases including, Campbell v. Trustees of Leland Stanford Jr. University Campbell 817 F.2d 499, held that “narrow restraint exceptions” to the rule against non-compete agreements were acceptable.  These cases left lawyers and clients pondering such questions as whether a non-compete provision in an employment or severance agreement was narrowly tailored enough to qualify as a “narrow restraint exception”.  Was the prohibition applicable to a small enough geographic area, we would ask?  Would a non-compete agreement limited to a particular industry or sub-set of an industry be sufficiently limited in scope to qualify?  The answers weren’t clear until late in 2008.     In the case of Edwards vs. Arthur Andersen LLP 44 Cal. 4th 937 (2008), the California Supreme Court finally provided a definitive answer and your employer clients probably won’t like it.  The Edwards decision isn’t really new news.  In fact, in Chamberlain v. Augustine 172 Cal. 289 (1916), the court already expressed the rule that partial restraints violate the rule against non-compete agreements and that was nearly one hundred years ago.  Edwards doesn’t make new law but it does shut the door, once and for all, on those who would seek to restrain a past or present employee from seeking employment in his or her chosen field and in their chosen geographic area.     As part of his employment, Edwards was required to sign an agreement which prevented him from performing work for Andersen’s clients for 18 months after he left the giant accounting firm.  The agreement also prevented him from soliciting clients of the firm for 12 months following his departure.  Naturally, under the narrow exception rule, Andersen argued that Edwards was free to work in his chosen field and the restraint on his employment was sufficiently limited to fall within the exception.  The California Supreme Court disagreed.     California has now firmly established the rule against non-compete agreements except in limited circumstances, again.   Bare in mind, agreements that protect trade secrets remain enforceable as do agreements that restrain the employment of someone selling a business or partnership interest in a business.   The Edwards case does nothing to limit a business’ right to protect its trade secrets under Civil Code 3426, the Uniform Trade Secrets Act.  Trade secrets include not only secret formulas and processes, the idea of trade secret protection is broad enough to include customer lists and other data used by a business to promote itself or sell its products.   When drafting employment and severance agreements, the attorney must be careful to include a restraint on the use of trade secret information without simultaneously restricting an employee’s ability to be employed or limiting the employee’s business prospects.     While California has now solidified the rule against non-compete and non-solicitation agreements, many other states continue to allow enforcement of broadly drafted non-compete and non-solicitation agreements.  California has long ago rejected the notion that a California citizen working in the State of California could have their employment governed by the laws of another state because of a choice of law provision contained in an employment agreement.  Other states deal with the issue differently.  If you represent an employee who has signed an employment agreement with a choice of law provision that requires the entire agreement including the non-compete agreement to be interpreted according to the laws of a state other than California, and a dispute has arisen, you may have to race to the court house to obtain a ruling in California that the choice of law provision is unenforceable.       At the beginning of the twenty-first century, the court in Armendariz vs Foundation Health Psychare Services, Inc. 24 Cal. 4th 83 (2000), established the minimum procedural and substantive requirements that must be present for an arbitration agreement between and employee and employer to be enforceable in California.  If you represent an employee that has signed an employment agreement containing a provision requiring arbitration to be conducted outside of California according to the rules and laws of another state, whether or not the agreement is valid was not made clear by the Edwards case.  We can only hope that the courts extend the same degree of protection against non-compete and non-solicitation agreements in these situations but, that question has yet to be decided.  After all, shouldn’t all California employees be entitled to the same protections even when they work for companies based outside the state?  Employers from other states or countries who enjoy the robust nature of our California economy should not be able to circumvent decades of legal evolution with a single clause in a contract many employees fail to read and when they do, fail to unerstand.      What to do?  If you represent a business that has or is considering trying to implement or enforce a non-compete or non-solicitation agreement, review the agreement to determine if the client is protecting trade secrets or if it is an attempt to restrain an employee from working for a competitor or starting a competing business.  Your business client may not like the news you report so be prepared.  Despite the ruling in Edwards, non-compete and non-solicitation agreements drafted during the preceding years are still out there and employers have been sharing information with employees assuming the information was protected.     If you represent an employee, the over-reaching employer’s attempt to restrain your client’s employment may, in itself, be a tort worth pursuing.  While you consider going on the offensive, you should take care to examine whether or not your client has or intends to use the trade secrets of his/her former employer while working for a new employer or in pursuit of their own business.  If you’ve been contacted by the out of state employer’s legal counsel, and believe a problematic arbitration clause and choice of law provision may be enforceable in the employer’s home state, consider a preemptive filing seeking declaratory relief invalidating the troublesome clause.