The Benefits and Perils of Hiring from Competitors

By Scott J. Ivy
Lang, Richert and Patch

Regardless of the industry, almost every business has been faced with an increasingly common dilemma. Your star salesperson or employee, to whom you have devoted significant amounts of time and money training and developing, suddenly announces he or she is leaving to join a direct competitor. Will your customers follow? Will the employee divulge your confidential information in an attempt to lure his or her former customers to his new firm? The hiring company faces similar issues. Will the employee’s former customers follow him or her to your business, a key issue given that you have likely agreed to pay a sizable salary or bonus with the expectation that is exactly what will occur. Will the former employer sue, thereby preventing those very customers from transferring their business and/or at the very least tie your company up in expensive litigation for the next several years? Unfortunately, as many companies learn too late, whether or not the former employer can successfully prevent the new employer from “stealing” these customers is often set in stone by the time litigation is commenced.

In California, the scales are heavily weighted in the favor of the departing employee’s right to join a competitor and accept business from his former customers. California Business & Professions Code Section 16600, one of the strongest such provisions in the nation, provides that any contractual provisions that directly or indirectly impede an individual’s right to engage in lawful employment or competition is void. Thus, no matter how artfully drafted or narrowly drawn, covenants not to compete may not be enforced by California courts in the absence of limited statutorily created exceptions.1

Section 16600 does not, however, invalidate provisions precluding use or disclosure of trade secrets or narrowly drawn “non-solicitation” provisions, although the law again still favors the departing employee even when such provisions are at issue. For example, California law is clear that a departing employee is entitled to lawfully “announce” his or her change of employment to the former clients regardless of the existence of a non-solicitation provision.2 The basic right to announce his or her change of employment permits “announcements” to trade secret clients of the former employer, and if done properly, even allows the departing employee to possess and use trade secret customer lists for purposes of making such announcements.3 However, the line between unlawful “solicitation” and lawful “announcements” becomes somewhat blurred when anything more than a bland statement indicating the employee’s new affiliation is attempted.4 That being said, assuming the employee limits the communication to a pure “announcement,” the willingness of the employee to discuss business (i.e. “solicit”or convince them to move their business to the new firm) will not be deemed unlawful solicitation so long as it was at the invitation of the customer receiving the announcement.”5

Despite the breadth of Section 16600 and the fundamental policy allowing employee “announcements,” the former employer is not left without remedy to prevent a departing employee from using its confidential and proprietary information to solicit his or her former customers with impunity. While covenants not to compete are generally unenforceable in California, California law has long recognized the propriety of provisions by which employees agree not to use or disclose an employer’s confidential and trade secret information, as well as agreements not to solicit their employer’s customers upon terminating their employment.6 Moreover, California has adopted the Uniform Trade Secrets Act, which prohibits the acquisition, use or disclosure of trade secret information, even in the absence of a non-disclosure and/or non-solicitation agreement. California Civil Code Section 3426.1, et seq.

Even more so for the former employer, whether the employee will be precluded from seeking to obtain business from his or her former customers is again largely dependent upon events which occurred when and often long before the employee departs. Was there a written employment agreement containing a non-solicitation provision? Did the former employer take reasonable steps to maintain the confidentiality of the trade secrets as required by the UTSA, such as identifying to the employee certain information it considers “trade secrets,” having written confidentiality agreements, restricting access to the information on a “need to know” basis, and password protecting computer information?7 Did the employer conduct an “exit interview” to reiterate its policies and confirm that no trade secret information was taken? Did the employer preserve and inspect the departing employee’s computer to identify unauthorized downloading or copying of confidential information in preparation for the move?8 Did the employer notify the new employer of the existence of any non-disclosure agreements to establish any future use was “wrongful” or to support a claim for interference with existing or prospective advantage? While none of the above factors is itself determinative, California Courts have generally identified similar policies and procedures which, if not absolutely required, will weigh heavily on whether the former employer will be entitled to relief.

While the legal issues implicated in these situations are specialized, they are fairly well defined. Thus, whether on the side of the former or new employer, the law provides a framework under which the potential damages and/or risks can be significantly decreased if the proper steps are followed before and immediately after the employee departs. The moral of the story is clear: If a company is considering legal action against a former employee who has already joined a competitor, or is faced with the threat of litigation regarding the completed hiring of an employee from a competitor, the chances for success in that litigation will in all likelihood be determined in large part based upon events that have already occurred.

Mr. Ivy is currently Of Counsel to the law firm of Lang, Richert & Patch in Fresno, California. Prior to joining Lang, Richert & Patch, Mr. Ivy was a partner with Musick, Peeler & Garrett LLP in Los Angeles, specializing in trade secret and general business litigation.

  1. Edwards v. Arthur Anderson LLP (2006) 142 Cal.App.4th 603 (review granted)
  2. Aetna Bldg. Maintenance Co. v. West (1952) 39 Cal.2d 198, 2004 (California law is clear that “[m]erely informing customers of one’s former employer of a change in employment, without more, is not solicitation.”)
  3. MAI Systems Corp. v. Peak Computer, Inc. (9th Cir. 1993) 991 F.2d 511 521; Hilb, Rogal & Hamilton Ins. v. Robb (1995) 33 Cal.App.4th 1812, 1821.
  4. Reeves v. Hanlon (2004) 33 Cal.4th 1140; Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514.
  5. Hilb, Rogal & Hamilton Ins., supra, 33 Cal.App.4th at 1821.
  6. See, e.g. John F. Matull & Associates, Inc. v. Cloutier (1987) 194 Cal.App.3d 1049, 1055; Gordon v. Wasserman (1957) 153 Cal.App.2d 328.
  7. Courtesy Temporary Services, Inc. v. Camacho (1990) 222 Cal.App.3d 1277, 1288; Whyte v. Schlage Lock Company (2002) 101 Cal.App.4th 1443, 1452-56
  8. Penal Code Sections 502(c), (e).