Nonsolicitation agreements are binding and can land a former employee of a company in hot water for unfairly competing by trying to poach clients from their previous employer.
When it comes to non-compete agreements or covenants not to compete, California law tends to favor the employee over the employer. The reason for this is that California law recognizes the need to protect a free market so that a former employee can still find work or go into business for themselves.
However, California law is much less sympathetic when it comes to using sensitive company material like client lists to unfairly compete. If you are involved in a case involving a nonsolicitation agreement where potential damages exceed $25,000 (a case with jurisdiction in “unlimited civil”), you need a reputable attorney on your side to defend you.
When Nonsolicitation Agreements Are Enforceable – Client Solicitation
The most important document to look at when considering if a nonsolicitation agreement is enforceable is the employment agreement that was signed when the employee took the job. A nonsolicitation agreement must clearly define the behavior that an employee is not to engage in after leaving the company. A period is generally specified, such as “should the employee be terminated from the company, the former employee will not reach out to current company clients for a period of 6 months”.
In addition to clearly defining the behavior the former employee is not to engage in, the employment agreement or contract must also be specific and not be so broad as to prevent the employee from reasonably being able to find other work or start their own business. A good example of when specific details can change the enforceability of a nonsolicitation agreement with regards to client solicitation is detailed below:
Example 1: Possible Violation – Trade Secret
Paul is employed with a major media company “ABC” in California. Paul leaves employment with the ABC company and begins an outreach campaign for his own media company. He uses client lists that he took from the company to reach out to former clients he worked with and offer them lower rates to bring them over to his company. Paul can be tried under California trade secret laws and be sued for damages by his former company.
Example 2: Not Liable Verdict Scenario
Paul is employed with a major media company “ABC” in California. Paul leaves employment with the ABC company and begins an outreach campaign for his own startup media company. His outreach campaign is targeted to business owners in his area with lists obtained from the internet and 3rd party list vendors and does not use company information obtained at ABC to solicit clients. He is accused of attempting to steal former clients. Paul will likely not be liable for theft of trade secrets of violating California trade secret laws and will be successful defending an action for damages, as he did not use company trade secret material to solicit any of ABC’s clients.
When Nonsolicitation Agreements Are Enforceable – Employee Solicitation
In addition to clients, employees are considered an asset when it comes to nonsolicitation agreements.
As discussed previously, California law recognizes the need for former employees of a company to be able to either work for a competing organization or start a business of their own with respect to a free market. As such, there are many cases where employees leaving a company may immediately work for a competing enterprise without legal repercussions. However, there are exceptions:
Example 1: Possible Violation – Nonsolicitation of Employees
Paul leaves ABC company and starts his own business without violating any agreements of his former company with respect to his individual efforts to create a new company. However, Paul attempts to poach the best sales people at his former organization by offering them higher commission incentives. Paul may be in violation of nonsolicitation of employees of ABC company with respect to agreements he signed when getting hired. He may even be in violation of trade secret agreements by using his knowledge of the employee commission incentives to offer higher incentives.
Example 2: Not Liable Verdict Scenario
Paul leaves ABC company and starts his own business without violating any agreements of his former company with respect to his individual efforts to create a new company. Tom, one of the best sales people at ABC company, is fired. Tom seeks employment from Paul at his new company and Paul hires Tom. Paul does not use any client knowledge Tom possesses to steal clients and offers Tom different commission incentives than those offered by ABC company. ABC company threatens Paul with a nonsolicitation of employees lawsuit. Paul may be found not liable as he has not made any efforts to use his former working knowledge of employees or trade secrets to unfairly compete.
Business and Professions Code 16600 & 16601 – Definitions & Explanation
Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.
What does all this mean? To put it simply, if you have a business interest with your former place of employment, there may be a reasonable time or geographic limitation by which you can conduct business.
What makes a business interest strong enough that these limitations may be enforceable? Here are some examples:
Example 1: Possible Violation – Business and Professions Code 16600 & 16601
Paul leaves ABC company, severing ties with his former business partner Tom. Paul and Tom had worked together to develop a patent on a soda with a secret formula marketed to be sold in the San Diego, CA area. Paul and Tom had signed a noncompete agreement which also declared that if the partnership was ended, the party vacating the company could not start a similar company marketed in the same region for a period of 1 year. Within 6 months of leaving the company, Paul creates a new formula for a similar soda marketed in the same region. Paul may be found liable of violating Business and Professions Code 16600 & 16601, as the scope of the agreement was reasonable and his business venture may be considered unfair competition as it is reasonable to assume Paul is using trade secrets from the severed partnership to unfairly compete.
Example 2: Not Liable Verdict Scenario
Paul leaves ABC company, severing ties with his former business partner Tom. Paul and Tom had worked together to develop a patent on a soda with a secret formula marketed to be sold in the San Diego, CA area. Paul and Tom had signed a noncompete agreement which also declared that if the partnership was ended, the party vacating the company could not start a similar company marketed in the same region for a period of 5 years. After 2 years following leaving the company, Paul creates a new formula for a soda marketed in the same region. Paul may be found not liable of violating Business and Professions Code 16600 & 16601, as the scope of the agreement was unreasonable due to an excessively lengthy period.
Making a Trade Secrets Claim
Trade secrets per California Law need to be clearly defined with reasonable efforts to protect them in order for a trade secrets claim to be taken seriously in a California court of law.
Company assets, including commission incentives, employee and client lists, product specifications, formula ingredients, and other assets unique to an organization may be protected under California Law. It’s important to note that these processes must be clearly defined in any employment agreements that are signed.
It’s also important to note that what qualifies as a trade secret can sometimes be a gray area, as many company processes and even current clients can sometimes fall outside the scope of being considered trade secrets. As you’ve seen in previous examples, Paul can market inadvertently to current clients of a previous place of employment and not violate trade secret agreements if he did not do so intentionally, such as with client lists stolen from the company. In other examples, such as with the company that sells a patent on a soda formula, it is possible for Paul to create his own soda brand which utilizes many ingredients already known to make your typical soda drink. This is perfectly fine if the complete recipe is not the same and the ingredients that make ABC company’s soda unique are not stolen.
When it comes to California non-solicitation agreements, trade secrets, non-competes and CA non-solicitation law, the devil is in the details. Whether you are representing the company in the examples mentioned above or you’re sitting in Paul’s shoes, we can help.
The Ability to Settle is Invaluable
Not all California non-solicitation disputes end in a straight victory for either side. The ability to settle is one that should not be taken lightly and many cases end in a settlement that is an accepted compromise for both sides.
The most important consideration besides the settlement amount is any terms in the settlement that affect your ability to do business after the fact. If you are in Paul’s shoes, a settlement where you can no longer reasonably do business for yourself is not worthwhile. If you are in the company’s shoes, beyond damages you may or may not acquire from the settlement, you need to consider Paul’s ability to hurt your business in the future.
A valuable settlement can be weighed many ways. Webb Law Group is here to help you make that decision.
Are You Seeking an Attorney in a Nonsolicitation, Non-Compete or Trade Secret Case?
Whether you are the plaintiff or defendant in a nonsolicitation agreement case, Webb Law Group can assist you. Our law firm has years of experience dealing with business litigation matters including cases involving California nonsolicitation agreements, unfair competition, trade secret and non-compete agreements. We are happy to review your case and advise you on how we can help and what to do next.
Webb Law Group is a reputable business law firm with experience in matters involving California law, including handling breach of contract and fraud cases. Having a reputable attorney by your side for these matters will help give you the best possible chance of a positive outcome in your case. If you feel you need legal representation, we are happy to review your legal needs and provide consultation and support where necessary.
For questions, or to schedule a consultation, contact us today at (559) 431-4888 (Fresno) or (619) 399-7700 (San Diego).