California is well-known for enforcing non-compete provisions only under narrowly-defined circumstances. A recent case in the United States District Court for the Northern District of California (Richmond Technologies v. Aumtech Business Solutions) illustrates that protection of trade secrets can be one of those circumstances.
Jennifer Polito, a former employee of plaintiff Richmond Technologies (which does business as ePayware), started working for defendant Aumtech. ePayware brought suit, alleging that Ms. Polito misappropriated ePayware’s source code, license keys and customer list to help Aumtech compete against ePayware.
Previously, ePayware and Aumtech had entered into a Confidentiality and Non-Disclosure Agreement that contained a provision by which Aumtech agreed not to compete with ePayware “with similar product and or Service using its technology” for a period of one year.
California courts are known for not enforcing non-compete provisions except under narrowly-defined circumstances (see “California doesn’t *always* prohibit non-compete provisions”). In a case last year (Silguero v. Creteguard, Inc.), the Court of Appeal for the Second District held that an employer may not terminate an employee because of another company’s unenforceable non-compete agreement.
In 2003, Rosemary Silguero began working for Floor Seal Technology, Inc. (“FST”). In 2007, FST threatened Silguero with termination if she did not sign a confidentiality agreement that included an 18-month post-employment non-compete provision. Two months later, FST fired her.
California is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo.
Business and Professions Code Section 16601 says, to oversimplify a bit, that anyone who sells the goodwill of a business or his entire ownership interest in a partnership, limited liability company (LLC) or corporation may agree not to compete with the entity in the geographic area where it operates so long as the buyer, or a successor, continues to operate the business. Sections 16602 and 16602.5 provide similarly in the event that a partnership or LLC dissolves, or a partner disassociates from a partnership, or a member withdraws from an LLC.
The rationale: The buyer / new owner of an interest in a business should have an opportunity to make the business a success without being undermined by the seller / former owner.
Practical tip: When you buy a business, it’s OK – even prudent – to put restrictions on the seller’s ability to compete with you…even in California.
Related post: Non-compete Snares Conspiring Employer
Photo credit: stock.xchng
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Some companies force employees to sign proprietary rights agreements under which the employee automatically assigns to the company any patent applications that the employee files within one year of separation from the company. I have always considered these provisions unjustifiable. California law apparently has reached the same conclusion.
In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., et al., case number 07-cv-05248, the U.S. District Court for the Northern District of California held that such a provision is unlawful under California Business and Professions Code Sections 16600 (which pertains to restraints on engaging in a lawful profession, trade, or business) and 17200 (which pertains to unfair competition).
Prudent California employers now should make sure that any post-employment provisions in proprietary rights agreements:
- Do not include automatic assignment of any post-employment inventions
- Limit provisions concerning post-employment inventions to those inventions that were conceived during the employment period based on the employer’s confidential information
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
A longtime client was delighted to receive an acquisition offer from a large, publicly-held company (“Acquirer”). Once the acquisition closed, the client’s founder (“Founder”) would become a management-level employee of Acquirer.
Although Acquirer’s proposed employment agreement generally was acceptable, Founder was concerned about its non-compete provision. That provision stated that for one year following termination of his employment, Founder would not “engage in any business activities that are competitive with the business activities of [Acquirer] or those of its subsidiary or parent companies”. The problem was that the business of Acquirer and its affiliates was so vast, and Founder’s expertise was so industry-specific, that the provision would have limited Founder’s ability to be employed elsewhere.
Acquirer’s General Counsel stated that the non-compete provision was non-negotiable - if founder did not accept that provision, the acquisition would not take place. In addition, the GC said that even though Founder lived in California and would be working at Acquirer’s offices in California, the provision stating that the agreement would be “governed by and construed in accordance with the laws of the State of New York” also was non-negotiable.