Although covenants not to compete are generally unenforceable in California, a recent federal court injunction demonstrates that California employers are not powerless to stop former employees from using misappropriated trade secrets to solicit their former employers’ customers.

In Pyro Spectaculars North, Inc. v. Souza, decided March 21, 2012, a judge in the Eastern District of California concluded that California’s general statutory prohibition against covenants not to compete does not prevent a court from enjoining the former employee’s solicitation of customers as a remedy for the theft of trade secrets.

The plaintiff employer, PSI, produces fireworks displays. It alleged in the suit that defendant Souza, in his 17 years as an account executive with PSI, had access to the company’s trade secrets and confidential information—including lists of customer information developed over decades—and recently left PSI to join a competitor.

Souza signed a confidentiality agreement early in his career at PSI in which he agreed that “all account or customer lists, trade secrets, unique display designs or knowledge gained are the exclusive property of Pyro Spectaculars, Inc.,” and agreed “not to divulge any knowledge, trade secrets, formulas, patents or unique display designs to anyone” outside PSI.

Shortly after Souza resigned, PSI learned that he was soliciting PSI’s customers to move their business to his new employer. Forensic analysis of Souza’s PSI-issued laptop revealed that, shortly before resigning, Souza had transferred more than 60 files to external hard drives. Based on this knowledge, PSI filed suit against Souza, alleging claims for violation of the federal Computer Fraud and Abuse Act, violation of California Penal Code Section 502, breach of contract, breach of loyalty, breach of the implied covenant of good faith and fair dealing, misappropriation of trade secrets, tortious interference with prospective economic relationship and economic advantage, unfair business practices, and conversion.

Following expedited discovery, PSI moved for a preliminary injunction. Souza admitted to using PSI’s information, and acknowledged that he did so in violation of his agreement with PSI, but argued that the information was not “confidential” within the meaning of the California Uniform Trade Secrets Act (CUTSA) because most of the information was publicly available and could have been discovered through time and research. The court rejected this argument, explaining that, regardless of whether some of the information was public knowledge, it was subject to CUTSA protection because it “provides a virtual encyclopedia of specific PSI customer, operator and vendor information at a competitor’s fingertips, allowing the competitor to solicit both more selectively and more effectively without having to expend the effort to compile the data.”

Souza also argued that PSI had waived its arguments that the information could be deemed confidential by failing to keep it secure. He noted that PSI employees were not told they could not share their computer passwords, and that extra paper copies of the information were not always shredded. While the court agreed that PSI’s efforts to maintain secrecy of the information were “not perfect,” it held they were reasonable under the circumstances, and that an employer need not turn its business into an “impenetrable fortress” to protect its trade secrets.

In deciding whether an injunction was warranted, the court discussed the relationship between California Business and Professions Code Section 16600—which generally prohibits covenants not to compete—and CUTSA relief. The court looked to language in the California appellate court’s decision in Retirement Group v. Galante (2009) 176 Cal. App. 4th 1226, which had noted that the “former employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee’s new business if the employee is utilizing trade secret information to solicit those customers . . . thus it is not the solicitation of the former employer’s customers, but is instead the misuse of trade secret information that may be enjoined.” Accordingly, the Souza court noted that the fashioning of such a restriction “turns on the facts of the individual case.”

In weighing the evidence before it, the court made repeated reference to concerns regarding Souza’s credibility. It noted that Souza had lied to PSI at the time of his resignation by claiming he had “no other employment lined up,” that he had failed to account for several thumb drives on which he had saved PSI information, and that he gave testimony that contradicted his declaration. The court concluded that his “probable misappropriation has thus far so tainted Defendant’s base of knowledge that it would be very difficult, at least over the next several months, for Defendant to separate his general pyrotechnics information and skills from PSI’s legitimate trade secrets when competing with PSI.”

Accordingly, the court ordered Souza to return any PSI documents still in his possession, and enjoined Souza for six months from directly or indirectly initiating contact with customers in his previous sales regions at PSI with whom he had contact or for whose accounts he had responsibility at PSI, for the purposes of soliciting transfer of business from PSI. The injunction was not extended to Souza’s employer, so long as Souza did not have any direct or indirect involvement in the solicitation.

While the Souza decision recognizes California’s public policy favoring employees’ rights to compete with their former employers, it provides a helpful guide for California employers whose former employees attempt to compete with them through the use of trade secrets and confidential materials. A requested injunction sought solely for the purposes of ending the solicitation likely will not be granted, but such an injunction may be granted where the employer can establish that it is “focused on protecting against the misuse of trade secrets.”

The decision is a reminder to employers that their business may indeed be built on protectable trade secrets, and that employers must proactively protect such confidential information in order to have it recognized as a trade secret under the law. The decision will be particularly helpful in cases where an employer can also demonstrate that a former employee has engaged in blatant unfair competition such that a court will doubt that an order that trade secret materials be returned would be sufficient to ensure that any misappropriation is stopped.

For further information about how to seek such an injunction, or how to best protect your company’s trade secrets and confidential information, please contact the member of Ballard’s Spahr’s Labor and Employment Group or Intellectual Property Litigation Group with whom you work. 

Copyright © 2012 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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