Recent Cases Dealing With Non-Solicitation Clauses

Of Counsel

Update: Cases Since 2009 Dealing With Non-Solicitation Clauses (State and Federal)

In the The Death of The Non-Solicitation Clause article we suggested non-solicitation clauses had been struck a blow and were on their last legs, looking at cases in 2009.  Since that time, more cases have dealt with such clauses and confirmed its meager existence.

State Court Cases Since TRG and Dowell

In Wanke v. Superior Court, 209 Cal.App.4th 1151 (2012), the California Court of Appeal for the Fourth District considered a non-solicitation clause, but not in an employment agreement.  Rather the clause was part of a stipulated injunction, which prohibited the former employees and their new company from soliciting any of their former employer’s clients for 18 months.  Id. at 1177-80.

In its statement of the controlling law, the court held:

Thus, under Edwards, Business and Professions Code section 16600 generally prohibits the enforcement of a non-solicitation agreement in all cases in which the trade secret exception does not apply.

Id. at 1177.

The court then in a footnote noted that Dowell court had questioned the “continued viability of the common law trade secret exception to covenants not to compete,” but then stated the former employees in the lawsuit at issue had in fact conceded in their opening brief the existence of the trade secret exception when the non-solicit clause “is necessary to protect the former employer’s confidential trade secret information.”  Id. at 1178, fn. 28.  The court therefore concluded:

Accordingly, we assume for purposes of this decision that . . . “the misuse of trade secret information … may be properly enjoined by agreement under [Business and Professions Code] section 16600.”

Though the Wanke court upheld the exact type of non-solicitation provision the Supreme Court held invalid in Edwards, the court was careful to point out that the parties had implicitly agreed the customer list was a trade secret by way of the settlement and the court further noted no evidence was presented to establish the customer list was not a trade secret:

[T]he Stipulated Injunction is also supported by fundamental fairness and common sense. [The former employees and their new business] may not stipulate to an injunction that identifies certain customers whom they will not solicit, in order to resolve claims that they misappropriated [their former employer’s] trade secrets, then proceed to violate the Stipulated Injunction and defend against its enforcement by claiming that [their former employer’s] customer list is not a trade secret…[S]ince the trial court could not conclude, based on the language of the Stipulated Injunction, that it does not protect [the employer’s] trade secrets the court erred in concluding that the Stipulated Injunction was an unlawful business restraint.

Id. at 1179.

Federal Court Cases Since TRG and Dowell

Federal courts have seen more action, with at least five cases dealing with non-soliciation clauses.  See Pyro Spectaculars – 861 F.Supp.2d 1079 (E.D. Cal 2012) (“Galante and Edwards have both acknowledged that non-solicitation restrictions may sometimes be necessary as long as it is focused on protecting against the misuse of trade secrets…The necessity of such a restriction necessarily turns on the facts of an individual case.”); Richmond Technologies, Inc. v. Aumtech Business Solutions, 2011 WL 2607158 (N.D.Cal. July 1, 2011); Fidelity Brokerage Services LLC v. McNamara, 2011 WL 2117546 (S.D.Cal. May 27, 2011); see also Farmers Insurance Exchange v. Steele Insurance Agency, Inc., 2013 WL 3872950, *13 (E.D. Cal.) (“When the trade secret exception applies, a plaintiff may succeed on a breach of contract claim that alleges that defendants breached the non-solicitation provisions of the agreement.”); and Couch v. Morgan Stanley, 2015 WL 4716297 (E.D. Cal).

In Couch, the former employee sued his former employer for intentional and negligent interference with existing and prospective economic relationships.  The plaintiff asserted the non–solicitation clause in his employment agreement violated California Business and Profession Code §16600 and 17200, and therefore constituted “wrongful conduct” sufficient to support his interference claims.  The District Court held that although the non-solicit clause may have been legal in 2007 when the employment agreement was entered (i.e pre-Edwards), the non–solicit clause was nevertheless “unlawful in and of itself, regardless of whether [the employer] attempted to enforce it.”  The court then concluded:

[The employer’s] use of the Non–Compete Clause was unlawful under California law and suffices as wrongful conduct to support Plaintiff’s interference claims. That [the employer] did not attempt to enforce them does not change this result. Although one party attempted to enforce the subject non-compete clauses in Dowell and Application Group, the courts held that simply placing the non-compete clauses in the subject contracts was unfair competition that violated section 17200.

Lessons Learned?

The general rule remains as established by the Supreme Court in Edwards non-solicitation clauses in employment contracts are prohibited.  Employers may use a no-solicit provision if it is narrowly tailored specifically to protect the employer’s trade secrets (i.e. prohibits an employee from using his former employer’s trade secrets to solicit business).  The key is the coupling of solicitation with the use of the information, which is by itself prohibited by the UTSA anyway.  That is to say, a provision that merely restates the UTSA is ok, but other than that, no.

And, there is risk to the employer for doing it wrong to boot, to avoid Couch claims.  Employers should even consider amending existing employment agreements to remove any broad no-solicitation provisions so as to limit its potential liability to its former employees.