CALIFORNIA COURTS CONTINUE TO STRIKE
DOWN NON-COMPETITION AGREEMENTS
While reasonable non-competition agreements are enforceable in most states, California remains hostile territory for companies wishing to bind their employees to such agreements.
The latest case involved Biosense Webster, Inc.
In that case, the California Court of Appeal refused to enforce Biosense Webster, Inc.'s non-competition and non-solicitation agreements with two California employees.
The plaintiffs in this case included St. Jude Medical S.C., Inc. and two employees who it hired away from Biosense. St. Jude and Biosense are competitors in the market for atrial fibrillation products.
Upon starting their employment with Biosense, the two
employees in question signed "Employee Secrecy, Non-Competition and
Non-Solicitation Agreements". These
agreements broadly prohibited Biosense's employees from rendering
services "to any CONFLICTING ORGANIZATION" in which such services
"could enhance the use or marketability of a CONFLICTING PRODUCT by
application of CONFIDENTIAL INFORMATION" that the employee had access
to during employment with Biosense. A
"conflicting product" was defined as one that resembles or competes
with a product the employee worked on, or knew about, as a result of
employment with Biosense. A "conflicting
organization" was a person or organization involved in the making,
marketing or selling of a "conflicting product". And
"confidential information" included a variety of "customer or
client-specific information" that is "not generally known" in
Biosense's trade or industry and was disclosed or known to the employee
through employment with Biosense. The
non-solicitation clause in these Agreements prohibited the employees
from soliciting, selling or rendering "any service", directly or
indirectly, "to any of the accounts, customers or clients" with whom the employees had contact during their last 12 months of employment. The clause remained in effect for 18 months after the employees' termination of employment.
In early-to-mid 2005, two employees left Biosense to take sales positions with St. Jude. Biosense
responded with a "cease and desist" letter demanding that St. Jude stop
its "unlawful raiding" of Biosense employees and informing St. Jude of
the non-competition covenants in the Agreements signed by the two
former Biosense workers. Biosense further indicated that it intended to file a lawsuit if necessary and demanded a response within two weeks.
St. Jude and the two employee's turned the tables on Biosense seeking a court order invalidating the agreements. Biosense
filed its own lawsuit against St. Jude and the two former workers for
unfair competition, and accused St. Jude of unlawfully "raiding"
Biosense employees, by attempting to induce those employees to leave
Biosense and use "insider knowledge" to "unfairly recruit" Biosense
personnel. The trial court ruled that the non-competition agreements at issue violated California law. Bioseal appealed that ruling, but the Court of Appeal refused to enforce the non-compete agreements.
The appellate court ruled that the non-competition agreement was at odds with Business and Professions Code Section 16600. That statute states: "Except
as provided in this chapter, every contract by which anyone is
restrained from engaging in a lawful profession, trade, or business of
any kind is to that extent void". The Court reasoned that the agreement was broad enough to restrain two former workers "from practicing their chosen profession". The Court also rejected Biosense's argument that the agreements were lawful because they were designed to protect trade secrets and confidential information.
The
Court noted that the phrase "confidential information" was defined so
broadly in the agreement that "it seems nearly impossible that [the]
employees, who worked directly with customers, would not have
possession of such information". The Court
also observed that the agreement went "well beyond prohibiting active
solicitation" and prohibited departing employees from selling or
otherwise serving Biosense customers, directly or indirectly - "even if
it is the customer who solicits the former employee". The Court also upheld the lower court's
dismissal of Biosense's cross-complaint for unfair competition. It
noted that "the mere hiring of at-will employees is not unlawful by
itself; rather, it must be accompanied by some unlawful act". The Court found no evidence that St. Jude did anything wrong in connection with its hiring of the two former Biosense workers.
The Court of Appeal's decision in Dowell reinforces just how difficult it is for California employers to enforce non-competition and non-solicitation agreements. It
is not enough for the agreement to simply define the employer's trade
secrets and confidential information, while broadly prohibiting
solicitation of the employer's customers. The
non-solicitation clause must be narrowly drafted so that it only
prevents misuse of trade secrets, rather than preventing lawful
competition. Your contact at the Firm has experience drafting non-solicitation covenants and litigating these cases in court. We
are ready to assist you if you have any questions about this topic, or
wish to arrange for a review of your existing or proposed employment
agreements.
For more information, call us today at (818) 508-3700,
or visit us on the web, at www.brgslaw.com.
Sincerely,
Richard S. Rosenberg
Partner
BRG&S, LLP
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