Is There A Trade Secret Exception To The California Business And Professions Code Section 16600?

Many employers in California require their employees to sign a non-compete and/or non-solicitation agreement. Presumably, employers believe that the only way to protect their trade secrets and seek legal recourse for misappropriation of said secrets is by having their employees sign a longwinded and overly broad statement acknowledging certain categories of items, procedures, data and methodology as confidential property of the employer.

Unbeknownst to the employers, these types of agreements are generally void even if they are narrowly tailored, i.e., limited in geographic location and time. This is because California Business and Professions Code §16600 states: "Except as provided in this Chapter, every contract by which anyone is restrained from engaging in lawful profession, trade, or business of any kind is to that extent void." Sections 16601-16602.5 specifically identify the three exceptions to the general rule. These exceptions deal with non-compete agreements made in the context of dissolution of a partnership/limited liability company or the sale of the goodwill of a business.

Until recently, California Courts unanimously used the so called trade secret exception to enforce these non-complete/non-solicitation agreements. Specifically, courts routinely held that a non-compete agreement was valid and enforceable if it was necessary to protect "trade secret(s)" of the former employer.
In the recent case of Dowell v. Biosense Webster, Inc., California Court of Appeal questioned whether or not there was a common law trade secret exception to Business and Professions Code Section 16600. Following in the footsteps of Edwards v. Arthur Andersen LLP and The Retirement Group v. Galante, the Dowell court concluded that Section 16600 "prohibits employee noncompetition agreements unless the agreement falls within a statutory exception."

The Dowell court further noted: "Section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee's new business, but a court may enjoin tortuous conduct (as violative of either the Uniform Trade Secret Act and/or the unfair competition law) by banning the former employee from using trade secret information."

Hence, according to the Dowell court, claims of misappropriation of trade secrets are actionable and the "conduct is enjoinable not because it falls within a judicially created 'exception' to section 16600's ban on contractual non-solicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking."

However it is also important to note that the Dowell court, for some reason stopped short of clearly rejecting the common law trade secret exception to non-compete and non-solicitation agreements. Thus, it appears that while there is no clear authority California Courts are beginning to question the validity and enforceability to restrictive covenants in the context of theft of trade secret cases. Since theft of trade secret is a tortuous conduct, a fully executed non-compete agreement is not a prerequisite to enjoining an employee from misappropriating trade secrets of the former employer.

More importantly, if courts continue to follow in the footsteps of Dowell, employers who may be trying to protect their confidential information by compelling their employees to sign a non-compete or non-solicitation agreement may be liable for violating unfair competition laws such as Business and Professions Code § 17200.

If you are involved in a theft of trade secret claim, it is vital to have the experienced business litigation attorneys of Fisher & Talwar on your side. Attorneys at Fisher & Talwar are skilled in litigating misappropriation of trade secret claims. Contact Los Angeles trade secret attorneys at Fisher & Talwar at 213-891-0777 or vt@fishertalwar.com for immediate assistance.