A California Court of Appeal has upheld the state's broad rejection of noncompetition clauses but reaffirmed that a former employee may be barred from soliciting existing customers if he or she unfairly uses trade secrets to do so. It is critical, therefore, that employers be able to demonstrate that they have taken reasonable measures to keep trade secrets confidential.

In The Retirement Group v. Galante (37-2008-91267 – CU-BT-CLT, July 30, 2009, certified for publication August 20, 2009), the court vacated a preliminary injunction enjoining former investment advisers from directly or indirectly soliciting the plaintiff's customers to persuade them to transfer their business to the defendants' new business. The defendants had informed many of their customers that they had left for a new entity and given them forms if the customers wished to follow them. The preliminary injunction enjoined numerous categories of conduct, including a prohibition against directly or indirectly soliciting such a transfer of business.

The appellate court decision reaffirmed the strong public policy in California, expressed in Business and Professions Code Section 16600, in favor of free competition and against the enforcement of noncompetition agreements. In so doing, the court supported California's rejection of the common law "rule of reasonableness," i.e., that a restraint on a former employee's practice of a trade or occupation is valid if reasonable. The court rejected the plaintiff's argument that nonsolicitation clauses are enforceable if they are narrowly crafted and do not entirely prevent former employees from pursuing their vocation of choice.

However, the court also reaffirmed that even in California, a former employee may be barred from soliciting existing customers if the employee unfairly uses trade secret information to do so. In rejecting the argument in The Retirement Group that such an injunction would be appropriate whenever former employees are shown merely to have had access to information purporting to be trade secrets, the appeals court pointed out that the plaintiff did not dispute that customer contact information was readily available from independent third-party sources.

Contact Information

If you have questions or concerns regarding The Retirement Group decision or noncompetition clauses in general, please contact any member of Ballard Spahr's Labor and Employment Group.

Copyright © 2009 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This newsletter is a periodic publication of Ballard Spahr LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.

Related Practice