1. Are nonsolicitation provisions of employment contracts enforceable under California law?
2. To what extent are these provisions enforceable?
3. To what extent are these provisions enforceable under Idaho law?
SUMMARY OF CONCLUSION
In California, the issue of nonsolicitation provisions with regards to solicitation of employees has not been conclusively decided. However, the California legislature and California courts have set a strong precedent against these kinds of provisions.
The California Supreme Court held that provisions of this kind are only enforceable when doing so is necessary to preserve a trade secret (barring a few unrelated exceptions under section 16600).
Idaho law is much friendlier toward nonsolicitation agreements and other post-employment restrictive covenants. If the covenant involves a “key employee” and is used to protect a legitimate business interest, it is largely presumed to be reasonable. Furthermore, Idaho law sets forth a number of rebuttable presumptions that clearly favor corporations involved in these kinds of disputes and sets forth a clear construction and enforcement protocol for Idaho courts to follow. If the company can prove that the employee made fraudulent misrepresentations or fraudulently concealed information in order to induce the company to agree to the California choice of law provision, then it is unclear what law will govern the original document.
In California, noncompete and nonsolicitation provisions are considered restrictive covenants and are governed by California Business and Profession Code Section 16600. The provision reflects California’s clear policy stance regarding the broad right of any citizen to pursue lawful employment of their choice. See Advanced Bionics Corp. v. Medtronic, Inc., 29 Cal. 4th 697, 706 (2002); see also Weber v. Lipshie & Co. v. Christian, 52 Cal. App. 4th 645, 659 (1997). California courts have “consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility.” Edwards v. Arthur Andersen, LLP, 44 Cal. 4th 937, 946 (2008). “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.” Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 575 (2009) (quoting Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (1968); see D’Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (2000)).
California Business and Profession Code Section 16600 sets a high bar for acceptable nonsolicitation agreements. Generally, agreements “that attempt to ban former employees from soliciting or working for former clients” are void. California Business Litigation 8-6:3.1. The question of enforceability of nonsolicitation agreements regarding employees of a former employer is “unsettled.” Id. at 8-6:3.2. The seminal case regarding section 16600 is Edwards, yet “no Court of Appeal decision has squarely analyzed whether employee non-solicitation agreements survive Edwards.” Id. However, a number of federal district courts have upheld nonsolicitation agreements regarding employees after Edwards. Arthur J. Gallagher & Co. v. Lang, No., C 14-0909 CW, 2014 2195062, at 4 (N.D. Cal. May 23, 2014) (upholding nonsolicitation agreement); Sunbelt Rentals, Inc. v. Victor, No. C 13-4240, 2014 U.S. Dist. LEXIS 14416, at 29-30 (N.D. Cal. Feb. 5, 2014) (enforcing agreement not to solicit employees). But see, e.g., Fields v. QSP, Inc., No. CV 12-1238 CAS PJWX, 2012 U.S. Dist. LEXIS 78001, at 25-29 (C.D. Cal. June 4, 2012) (striking down a provision prohibiting employee solicitation as “per se unlawful under California law regardless of the reasonableness of the covenant”).
Under the California Supreme Court’s interpretation of Cal. Bus. and Prof. Code § 16600 in Edwards, nonsolicitation agreements are prohibited in all cases in which trade secrets do not apply. Wanke, Indus., Commercial, Residential, Inc. v. Keck, 209 Cal. App. 4th 1151 (2012). Therefore, broadly worded noncompete or nonsolicitation clauses are “facially void restrictions on the employees’ practice of their chosen profession.” Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 575 (2009). As previously stated, it is unclear how California Courts of Appeals will apply Edwards to cases involving solicitation of employees specifically. However, in Thomas Weisel Partners, the Northern District of California attempted to summarize current California law:
“California courts would hold [a no-hire provision] … unenforceable to the extent that it attempts to restrain a person from hiring his former colleagues after the cessation of his employment with their employer. An employer has a strong and legitimate interest in keeping current employees from raiding the employer’s other employees for the benefit of an outside entity. Such a restriction ‘only slightly affects [the] employees,’ who were not hampered from seeking employment… of their own accord.” Thomas Weisel Partners LLC v. BNP Paribas, No. C 07–6198, 2010 U.S. Dist. LEXIS 11626, at 17 (N.D. Cal. Feb. 10, 2010).
Though unclear how Edwards applies to nonsolicitation agreements regarding employees, the policy motives behind Bus. and Prof. Code § 16600 are sound as articulated by Edwards and its progeny. This policy applies equally to nonsolicitation agreements involving both employees and clients.
Nonsolicitation agreements are frowned upon in California, as an employee’s interest in mobility is paramount to both employees and employers in a competitive business landscape. These restrictive covenants restrict the compelling interest individuals have in being able to work freely. Therefore, nonsolicitation agreements are only enforceable under §16600 if they represent an attempt to protect a company’s trade secrets, since, arguably, businesses have a compelling interest in protecting those secrets. Further, courts have recognized a company’s compelling interest in safeguarding its employees from “raiding” from the competition, though the fear of raiding may not be enough on its own to make a non-solicitation agreement enforceable.
In the present case, the employer claims that the employee is in violation of the nonsolicitation provision of the Non-Competition, Confidentiality, and Proprietary Information Agreement he signed when joining the company in 2011. The provision reads as follows:
“Employee agrees that for so long as Employee… and 1 year after [employment] (regardless of reason for termination of such services), Employee shall not, directly or indirectly, (i) solicit, divert, recruit, induce, encourage, or attempt to influence any client, customer, employee, consultant, independent contractor, salesman or supplier of the Company to cease to do business, decrease level of business, or terminate his or her employment or otherwise cease his or her relationship with the Company, as the case may be…”
This provision is overly broad under Edwards and runs counter to the policy underlying the decision. The provision restricts the employee’s ability to seek employment in his own field “regardless of the reason” for his termination. The employee was an at-will employee. Under this agreement, employee could be fired at any point in time, and entirely barred from working in his own field. Employee is purported to be barred from “directly or indirectly” influencing anyone involved in employer’s business to “decrease [their] level of business” with employer.
This provision is overly restrictive and is not motivated by the company’s desire to protect its trade secrets. Under Edwards, nonsolicitation agreements are void in cases in which the trade secret exception does not apply. Explained further, nonsolicitation covenants “are void as unlawful business restraints except where their enforcement is necessary to protect trade secrets.” Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425, 1429 (2003). Broadly worded noncompete or nonsolicitation clauses are “facially void restrictions on the employees’ practice of their chosen profession.” Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 575 (2009). These provisions are not only “void and unenforceable” under section 16600, but their use also constitutes an unfair and unlawful business practice under section 17200. Id. Barring a former employee from taking any action that could “directly or indirectly… decrease the level of business” clearly restrains business in an unlawful manner.
In order to determine whether enforcement of this nonsolicitation agreement is “necessary to protect trade secrets,” one must look at the trade secrets specifically at issue in the present case. In the employer’s Complaint, the employer claims that employee misappropriated its proprietary information in the form of “business pipelines… financial models and pricing, nonpublic cell tower resource material, and structuring material and legal documentation.” Employer’s Complaint and Demand for Jury Trial. It is unclear how this enforcement of this provision could protect this “proprietary information” that according to employer’s Complaint, employee already had intimate knowledge of, and access to. Especially considering the fact that employee solicited ex-employees of the employer.
In addition to the protection of trade secrets, courts have recognized that companies have an interest in safeguarding their employees against “raids” from competitors. However, in the present case, the employee was not “raiding” the company, as he attempted to hire an ex-employee of the employer. For this reason, it is arguable as to whether the employee’s actions violated this provision, void or not, since the provision purported to make solicitation of employees actionable, while silent as to the solicitation of ex-employees.
Idaho Code Section 44-2701 defines the extent to which corporations may utilize agreements and covenants in order to protect their legitimate business interests:
“A key employee or key independent contractor may enter into a written agreement or covenant that protects the employer’s legitimate business interests and prohibits the key employee or key independent contractor from engaging in employment or a line of business that is in direct competition with the employer’s business after termination of employment, and the same shall be enforceable if the agreement or covenant is reasonable as to its duration, geographical area, type of employment or line of business, and does not impose a greater restraint than is reasonably necessary to protect the employer’s legitimate business interests.” Idaho Code § 44-2701 (Lexis Advance through the 2017 Regular Session)
Idaho Code Section 44-2702 defines “key employees” and “legitimate business interests” as used above:
(1) “Key employees” and “key independent contractors” shall include those employees or independent contractors who, by reason of the employer’s investment of time, money, trust, exposure to the public, or exposure to technologies, intellectual property, business plans, business processes and methods of operation, customers, vendors or other business relationships during the course of employment, have gained a high level of inside knowledge, influence, credibility, notoriety, fame, reputation or public persona as a representative or spokesperson of the employer, and as a result, have the ability to harm or threaten an employer’s legitimate business interests.
(2) “Legitimate business interests” shall include, but not be limited to, an employer’s goodwill, technologies, intellectual property, business plans, business processes and methods of operation, customers, customer lists, customer contacts and referral sources, vendors and vendor contacts, financial and marketing information, and trade secrets as that term is defined by chapter 8, title 48, Idaho Code.
Restrictive covenants involving key employees may not restrict post-employment direct competition for a period exceeding eighteen months from the time of termination without consideration. Idaho Code § 44-2704 (Lexis Advance through the 2017 Regular Session). Id. Restrictive covenants with a post-employment term of eighteen months or less, limited to the geographic area where the key employee worked, limited to the line of the business conducted by the key employee, restricting a key employee specifically, are presumed to be reasonable. Furthermore, Idaho law automatically creates a “rebuttable presumption of irreparable harm” if a key employee is “in breach of an agreement or covenant.”
In determining the reasonableness of the restrictive covenant, the court “shall limit or modify the agreement or covenant as it shall determine necessary to reflect the intent of the parties and render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement or covenant as limited or modified.” Idaho Code § 44-2703 (Lexis Advance through the 2017 Regular Session). Therefore, provisions that are determined to be unreasonable by an Idaho court are not simply considered void but are actively modified by courts.
It is clear that Idaho allows for more restrictive post-employment covenants than California. While California limits post-employment covenants to those specifically related to trade secrets, Idaho allows for covenants that serve any legitimate business interest. In the present case, it is clear that the nonsolicitation provision in the employment documents serve a legitimate business purpose, even if not specifically related to trade secrets. The provision is limited to a year, limited to the “line of business” employee engaged in, and is limited to a “key employee.”
However, the covenant is not limited in geographic scope. Under Idaho Code Section 44-2704(3): “It shall be a rebuttable presumption that an agreement or covenant is reasonable as to geographic area if it is restricted to the geographic areas in which the key employee or key independent contractor provided services or had a significant presence or influence.” The nonsolicitation provision in employer’s employment documents does not even mention a limited geographic area.
Importantly, even if the provision was held to be overly restrictive and unenforceable, Idaho Code Section 44-2703 provides that a court must modify the agreement and enforce the agreement pursuant to those modifications.
Choice of Law
Pursuant clause 12 of the Separation Agreement signed by employee and Employer’s CEO, the Non-Competition, Confidentiality, and Proprietary Information Agreement from July 12, 2011 is governed by and interpreted in accordance with the laws of California. However, employer claims that employee made material misrepresentations that fraudulently induced the company into entering the agreement. If employer’s claims are deemed to have merit, it could void the contract, and lead to the “Governing Law” provision of the July 12, 2011 agreement to be controlling.
However, the July 12, 2011 agreement, clause 5(b) states: “[t]his agreement shall be governed by and construed in accordance with the laws of the State in which Employee is employed by the Company, notwithstanding the conflicts of law principles of any jurisdiction to the contrary.” Since employee primarily operated out of the country, it is unclear which state’s laws would be considered binding under this provision. A court could feasibly determine California, Idaho, or even Delaware law to govern the agreement pursuant to this provision.
In California, the issue of nonsolicitation provisions with regards to solicitation of employees has not been conclusively decided. However, the California legislature and California courts have set a strong precedent against these kinds of provisions. The California Supreme Court held that provisions of this kind are only enforceable when doing so is necessary to preserve a trade secret (barring a few unrelated exceptions under section 16600).
Idaho law is much friendlier toward nonsolicitation agreements and other post-employment restrictive covenants. If the covenant involves a “key employee” and is used to protect a legitimate business interest, it is largely presumed to be reasonable. Furthermore, Idaho law sets forth a number of rebuttable presumptions that clearly favor corporations involved in these kinds of disputes and sets forth a clear construction and enforcement protocol for Idaho courts to follow.
The employee would benefit from an interpretation of the agreement under California law, and given the signed agreement determining California to govern the contract, it likely will be interpreted as such. However, if the employer can prove that employee made fraudulent misrepresentations or fraudulently concealed information in order to induce the employer to agree to the California choice of law provision, then it is unclear what law will govern the original document.
California Business and Professions Code
Cal. Bus. and Prof. Code § 16600
Cal. Bus. and Prof. Code § 17200
Idaho Code §44- 2701-04
• California Antitrust and Unfair Competition Law
• California Jurisprudence 3d
• California Business Litigation 8-6