When it comes to employment laws, California is among the most employee friendly jurisdictions anywhere.  A recent landmark ruling by the state's Supreme Court involving non-compete agreements has served to reinforce that reputation.

 

In a widely watched decision involving the now defunct accountancy practice of Arthur Andersen, the Supreme Court invalidated any agreement that seeks to restrict the right of an employee to go to work for a competitor or solicit a former employer's customers using non-trade secret information.  The case, called Edwards v. Arthur Andersen, LLC, is welcome news for employees and the competitor businesses that hire them away.

 

From the employee's perspective, the Court confirmed that agreements which prevent employees from going to work for a competitor or soliciting the former employer's clients using non-trade secret information violate California law.

 

From the employer's perspective, the case allows the company to ignore any such contractual restrictions that the new employee may have signed and opens the door for the new hire to poach the former employer's customers.

 

Although the Court invalidated agreements which restrict employee movement, it left intact another provision of California law that permits non-compete agreements in certain non-employment settings such as between the buyer and seller of a business, among partners dissolving their partnership or when obtained in connection with the acquisition of a company's stock.

 

Notably, the decision also did not disturb longstanding laws that permit a business owner to protect its valuable trade secrets.  Agreements which seek to protect a company's trade secrets are not affected by the Court's ruling at all.  Thus, employees who misappropriate the company's trade secrets still may be sued for damages and injunctive relief.

 

Some commentators are suggesting that employers retain the illegal provisions as a prophylactic, hoping that departing employees may adhere to the unenforceable restriction out of ignorance.  We do not think this is a good idea for several reasons.

 

For example, it is illegal in California for an employer to insist that a job applicant or an employee sign a contract or policy containing an illegal provision.  Doing so will set the company up for an expensive wrongful termination case if the employee is fired for refusing to do so or quits in protest.  In the latter circumstance, the quitting will likely be deemed an illegal constructive discharge.

 

Also, there has already been a lot of publicity about the case in the media.  Continuing the illegal practice could undermine employee confidence in management and have an adverse effect on morale.

 

In light of the Court's ruling, we are recommending that business owners take the following steps:

 

-   Review existing employment agreements or company policies for any provision that restricts employee movement or their post employment activities.  Have them reviewed by your contact at the Firm if you have any questions about whether the provision is still lawful.

 

-  Take this opportunity to enhance existing policies and agreements designed to protect company trade secrets.  If you don't have one, or you don't routinely ask employees to sign the one you do have, now is an excellent time to reduce your vulnerability to trade secret theft.

 

-  State trade secret laws require more than simply calling something a trade secret in a document.  Consult your contact at the Firm to learn what types of information qualify as trade secrets and what steps are essential for insuring that trade secret information will be protected.

 

-  The case did not address restrictions that preclude ex-employees from hiring away employees or soliciting them to leave the company.  Consider adding these protections.

 

-  Some commentators suggest that you get around the new ruling by putting the non-compete in a retirement plan contract.  The departing employees will thus jeopardize their retirement benefits if they don't adhere to the non-compete.  This suggestion is premised upon the theory that retirement plans are covered exclusively by federal benefits law (ERISA), and thus cannot be regulated by state law.  Since this is an untested theory, we recommend that you review this strategy with legal counsel.

 

Your contact at the Firm is available to discuss any questions or concerns you may have with regard to this new ruling.