The death watch continues for California's common law "trade secrets exception" to the prohibition against non-competition agreements, after another appellate court questioned its viability earlier this week.
Covenants not to compete are generally void in California, subject to only a few exceptions. The state has long recognized a "strong public policy" in favor of employees' interests in their own "mobility and betterment" and these interests are recognized as being paramount to the competitive business interests of employers. Thus, courts have consistently declared that every citizen has the right to pursue any lawful employment and enterprise of his or her choice. This principal has been codified in Business and Professions Code section 16600, which provides:
Covenants not to compete are generally void in California, subject to only a few exceptions. The state has long recognized a "strong public policy" in favor of employees' interests in their own "mobility and betterment" and these interests are recognized as being paramount to the competitive business interests of employers. Thus, courts have consistently declared that every citizen has the right to pursue any lawful employment and enterprise of his or her choice. This principal has been codified in Business and Professions Code section 16600, which provides:
every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
That section, or some version of it, has been California law since 1872.
On the other hand, a long line of cases in California has also held that former employees may not misappropriate their former employers' trade secrets to unfairly compete with them. (Confidential information that falls within the ambit of the exception is generally information that is valuable because it is unknown to others and which the owner has taken reasonable attempts to keep secret.) Thus, non-compete agreements have been enforced in California under common law in the context of protecting former employers' trade secrets. This is known as the "trade secrets exception" to section 16600.
In 2008, however, the California Supreme Court held that section 16600 "prohibits employee noncompetition agreements unless the agreement falls within a statutory exception." Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937 (emphasis added). This has led some to argue that, because it is not a statutory exception, the common law trade secrets exception no longer exists. This in turn has led to a rift between state and federal courts' approaches to the subject.
In the year following Edwards, two federal courts nevertheless found signs of life in the exception. In Asset Marketing Systems, Inc. v. Gagnon, 2008 WL 4138181 (2008), the Ninth Circuit Court of Appeals recognized that, "[u]nder California law, non-competition agreements are unenforceable unless necessary to protect an employer's trade secret."). Then, in Bank of America, N.A. v. Lee, 2008 WL 4351348 (C.D. Cal., 2008), a federal district court "conclude[d] that 'trade secret exception' to § 16600 still applies."
The state courts struck back the following year. In 2009, in Dowell v. Biosense Webster, Inc., 179 Cal.App.4th 564 (2009), a California appellate court openly expressed its "doubt [as to] the continued viability of the common law trade secret exception to covenants not to compete...." And this week, in an unpublished opinion, the California Court of Appeal again questioned the viability of the "so-called 'trade secrets' exception" and explained that it "rests on shaky ground" under California law.
In anticipation of the approaching end of the exception, in lieu of flowers, some employers are expected to be making donations to their lobbyists in Sacramento in the hopes of codifying it.
In the meantime, we will continue to monitor the vital signs of the exception in this space.
This week's unpublished opinion in Robinson v. U-Haul C. of California, is available here.
On the other hand, a long line of cases in California has also held that former employees may not misappropriate their former employers' trade secrets to unfairly compete with them. (Confidential information that falls within the ambit of the exception is generally information that is valuable because it is unknown to others and which the owner has taken reasonable attempts to keep secret.) Thus, non-compete agreements have been enforced in California under common law in the context of protecting former employers' trade secrets. This is known as the "trade secrets exception" to section 16600.
In 2008, however, the California Supreme Court held that section 16600 "prohibits employee noncompetition agreements unless the agreement falls within a statutory exception." Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937 (emphasis added). This has led some to argue that, because it is not a statutory exception, the common law trade secrets exception no longer exists. This in turn has led to a rift between state and federal courts' approaches to the subject.
In the year following Edwards, two federal courts nevertheless found signs of life in the exception. In Asset Marketing Systems, Inc. v. Gagnon, 2008 WL 4138181 (2008), the Ninth Circuit Court of Appeals recognized that, "[u]nder California law, non-competition agreements are unenforceable unless necessary to protect an employer's trade secret."). Then, in Bank of America, N.A. v. Lee, 2008 WL 4351348 (C.D. Cal., 2008), a federal district court "conclude[d] that 'trade secret exception' to § 16600 still applies."
The state courts struck back the following year. In 2009, in Dowell v. Biosense Webster, Inc., 179 Cal.App.4th 564 (2009), a California appellate court openly expressed its "doubt [as to] the continued viability of the common law trade secret exception to covenants not to compete...." And this week, in an unpublished opinion, the California Court of Appeal again questioned the viability of the "so-called 'trade secrets' exception" and explained that it "rests on shaky ground" under California law.
In anticipation of the approaching end of the exception, in lieu of flowers, some employers are expected to be making donations to their lobbyists in Sacramento in the hopes of codifying it.
In the meantime, we will continue to monitor the vital signs of the exception in this space.
This week's unpublished opinion in Robinson v. U-Haul C. of California, is available here.
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