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Sunbelt Rentals, Inc. v. Victor: Non-Competition covenants Take Yet Another Hit

Posted by HMS Law Group | Apr 16, 2014 | 0 Comments

By D. Ken Brock –

In California, it is now well established that non-competition covenants are generally void and unenforceable under Business & Professions Code §16600.  While there are very few exceptions to this general rule, courts have recognized that such agreements may be enforceable if they are necessary to protect the former employer's trade secrets.  By allowing a former employer to enforce such provisions, courts essentially try to balance the fundamental right which a former employee has to pursue a lawful trade or profession with the proprietary rights the former employer has in its intellectual properties and assets.

As a matter of practice, however, courts generally interpret the question of whether such non-competition covenants are “necessary” very narrowly and it appears that the Northern District of California may have narrowed this exception even further.

Specifically, in Sunbelt Rentals, Inc. v. Victor, an employer sought to enforce an employment agreement against a former employee which contained a non-solicitation provision.  The provision itself generally prohibited the employee from soliciting any customers who had purchased or leased products from the employer at any time during the 12 months immediately preceding the employee's termination.

During the course of seeking an injunction to enforce the agreement, the employer attempted to argue that the non-solicitation provision was necessary to prevent employees from using its proprietary customer account information to solicit the employer's customers following the termination of their employment.  In opposing the employer's motion, the employee argued that the non-solicitation provision represented an unenforceable non-competition provision for purposes of §16600.

In reaching its decision, the Court noted that the agreement would have prevented the employee from soliciting any of the employer's customers who had done business with the employer during the preceding 12-month period even if the customer was no longer doing business with the employer.  The Court also determined that the non-solicitation covenant would have applied even if the employer was unable to demonstrate that the former employee actually used the information but merely had access to it.  For this reason, the Court eventually determined the employment agreement's non-solicitation provision to be an invalid non-competition provision under §16600.

While the trade secret protection exception of §16600 remains in-tact, companies wishing to protect their trade secret customer account information via employment agreements or some other contract should take precautions to ensure that restrictions upon the use of any such information are narrowly tailored.

As an initial matter, since the purpose is to protect the information's confidentiality and not to prevent the former employee from pursuing a lawful trade or profession, these restrictions should be drafted as non-disclosure (as opposed to non-solicitation) provisions.  As an additional precaution, employment agreements should contain an express acknowledgement by the employee that the information is confidential and that the restrictions are strictly necessary to protect the information's secrecy.  Lastly, employers should also obtain the employee's acknowledgement that restrictions contained in the employment agreement would not prevent the employee from pursuing a lawful trade or profession.

In other words, even after Sunbelt Rentals, Inc. v. Victor, a properly-drafted employment agreement is still an employer's first and best line of defense against the misappropriation of its trade secrets and proprietary customer account information.

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