Noncompete Enforcement in California: The Times They Are a Changin’
By Jeffrey S. Kopp
We all may know that California does not permit enforcement of most noncompete agreements. Despite this broad prohibition, the federal court’s recent decision in Richmond Technologies, Inc. v. Aumtech Business Solutions, (N.D. Cal. July 1, 2011) confirms another overriding general rule: Courts do not like deceptive behavior of former employees — even in California. This decision makes it clear that when faced with egregious facts, you may have to think twice about the enforceability of noncompete agreements in California.
Richmond Technologies provided enterprise resource planning software for financial service companies who provide credit card terminals to merchants. Richmond entered into a “teaming agreement” with Aumtech, which developed software for Richmond and maintained the resource planning modules for Richmond’s customers. The agreement contained a confidentiality and nondisclosure agreement that prohibited Aumtech from disclosing or using confidential information, soliciting Richmond’s employees for one year, or entering into agreements with Richmond’s customers for one year following the term of Aumtech’s employment with Richmond.
Earlier this year, one of Richmond’s employees, Jennifer Polito, resigned her employment with Richmond and immediately joined Aumtech as its president. Significantly, she allegedly used three different programs to delete data from her company-issued computer before returning the computer to Richmond. Aumtech offered the same services to Richmond’s customers and began to encourage those customers to terminate their contracts with Richmond and to sign up with Aumtech. Specifically, Ms. Polito allegedly contacted one customer directly and participated in a trade show marketing Aumtech’s services. Before she left, Ms. Polito deleted emails with Aumtech and made it difficult for Richmond to continue to service their customers. When Richmond learned of this activity, it canceled its agreement with Aumtech and filed a motion for a temporary restraining order that would (1) compel Aumtech to release source codes to Richmond; and (2) enjoin Aumtech from competing against Richmond in violation of the nondisclosure agreement.
In deciding the motion, the court recognized that Cal. Bus. & Profs. Code Sec. 16600 (http://tinyurl.com/9zkxs) broadly prohibits “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” However, even though the court acknowledged the applicability of this section, the court also recognized that there is a long line of cases in California holding that former employees may not misappropriate the former employer’s trade secrets to unfairly compete with the former employer. Thus, the court determined that noncompetition agreements are enforceable when necessary to protect an employer’s trade secrets, either as an exception to the statute, or to enjoin an independent wrong (either a tort or violation of California’s Unfair Competition Law) (http://tinyurl.com/3vdmkp3). The court enjoined Aumtech from contacting Richmond’s customers and utilizing confidential information (the court recognized that customer preferences and specialized requirements may be trade secrets under California law).
This case highlights that deception and misconduct can be instrumental when considering whether to attempt to enforce a noncompetition agreement and to enjoin unfair competition. The fact that the court granted an injunction is not surprising in light of the alleged wrongful conduct and deceptive behavior. This case makes it evident that, even in California, the law does not permit unfair competition.
Firing Workers Who Argued Wage Dispute in News Interview Violated NLRA
By Jonathon W. Oliff
For most employers, the majority of the disputes they experience about discipline and termination of employees arise out of the protections employees enjoy from federal and state anti-discrimination statutes. However, employees also enjoy rights that are protected by the NLRA, even those employees who are not represented by a labor union. As we have addressed recently (http://tinyurl.com/3fsfh8v), disciplining employees based on statements about their employment made via social media can potentially present problems. Employers also should be aware of the risks involved when taking action against employees for comments made through more traditional medium. Recently, the NLRB (http://www.nlrb.gov/) found that an employer violated federal labor law when it fired employees for participating in a television interview and making comments critical of their employer.
Employees are entitled to engage in protected concerted activity for mutual aid or protection under Section 7 of the NLRA. It is unlawful for employers to interfere with, restrain, or coerce employees in the exercise of these rights or to take adverse action to discourage employees from engaging in union activities. An employee’s right to comment about workplace issues is not unlimited — disloyal disparagement of an employer will not fall under the NLRA’s protection.
In the recent MasTec NLRB decision (http://tinyurl.com/3nwq65m), an employer changed its method of compensating its technicians, making them subject to a back-charge if certain performance measures were not met. The technicians complained to their employer about the new pay method, but to no avail. Several weeks later, a group of technicians went to a local television station in their uniforms and were interviewed as a group for a news story. In the interview, the technicians voiced their objection to the new pay system and claimed they had been urged to tell lies to customers. Shortly after the interview aired, the technicians were terminated by their employer.
The employer claimed that while the technicians’ statements on television were related to a labor dispute, the statements were false, inaccurate, and misleading. Unfortunately for the employer, the NLRB disagreed, finding that the technicians’ communications and statements during the interview were not maliciously untrue or made with reckless disregard for their truth; any departures from the truth had been no more than good-faith misstatements or incomplete statements. Most critical in the NLRB’s decision that the technicians’ conduct was protected was the connection between the employees’ statements and their pay dispute with their employer.
Regardless of whether it occurs on television or some form of social media, employees do enjoy certain protection allowing them to voice labor concerns. Whether or not an employee’s specific conduct is protected from employer action depends on the particular circumstances surrounding the conduct. For example, employees are not protected if they publicly criticize an employer’s product and business practices without connecting their criticisms to a labor dispute. Additionally, an employer may still terminate employees when their conduct amounts to disloyal disparagement of the employer. Before taking action against an employee for “speaking out,” an employer should carefully evaluate whether an employee’s comments or conduct does indeed relate to some labor dispute, such as the technicians’ pay in MasTec.
Legal News is part of our ongoing commitment to providing legal insight to our clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or the authors of this week’s issue.