Non-compete Enforced to Protect Trade Secrets

California is well-known for enforcing post-employment 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) saw a non-compete enforced for the protection of trade secrets.

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.

Confidentiality Agreement

Previously, ePayware and Aumtech had entered into a Confidentiality and Non-Disclosure Agreement. That agreement 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. Naturally, ePayware wanted the non-compete enforced.

The court noted that, in various cases, California courts have held that trade secret protection may be seen either as an exception permitting enforcement of a non-compete provision or, alternatively, as the basis for an action based on tort or unfair competition law.

Accordingly, the court held that the NDA clause prohibiting use of confidential information is likely enforceable to the extent that the claimed confidential information is protectable as a trade secret. Furthermore, the court found that plaintiff likely would suffer irreparable harm in the absence of a temporary restraining order (TRO).

Non-compete Enforced

As a result, the court ordered the following narrowly-defined TRO, which illustrates when you can expect to see a trade secret-based non-compete enforced:

(1) After Plaintiff deposits $20,000 with the Court as bond, Defendants shall turn over all of the current source code and license keys developed for ePayware clients that have not yet been released to Plaintiff.

(2) Defendants are temporarily enjoined from listing current ePayware customers on the Aumtech America website in a manner that suggests those customers are Aumtech America customers.

(3) Defendants are temporarily enjoined from initiating contact with current ePayware customers or clients regarding Aumtech America’s enterprise resource planning software, unless none of the Defendants had knowledge of or contact with those customers during their terms of employment with ePayware. However, Defendants may engage in marketing efforts directed at the merchant services market as a whole, such as attending trade shows.

(4) Defendants are temporarily enjoined from using ePayware’s information about its customers’ technical and business requirements, or other confidential client information, to solicit or obtain agreements with those customers. However, Defendants may enter into agreements with ePayware’s customers if the customer initiates the contact and none of ePayware’s confidential information will be used in negotiating, executing, or performing the agreement.

(5) Defendants are temporarily enjoined from using any of ePayware’s source codes, software, methods, techniques, or other trade secret information in Aumtech America’s products or services. However, Defendants may provide and market similar, competing products and services, so long as none of ePayware’s trade secrets are used in those products or services.

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On March 21, 2012, the U.S. District Court for the Eastern District of California reached a similar result in Pyro Spectacluars v. Souza. In that case, defendant Souza downloaded encyclopedic information about his former employer’s customers and used it, at subsequent places of employment, to solicit business from those customers. Souza, his wife, his new employers, and their officers and employees were temporarily enjoined from possessing, using, disclosing, or transmitting the former employer’s trade secrets or proprietary information, including but not limited to customer information.

Related post: How Can I Avoid Misappropriating Trade Secrets?

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
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