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Re-thinking Employee Restrictive Covenants In A Post-Edwards Era

Stop me if you’ve heard this one before, “Employee agrees not to solicit any of the Company’s employees, clients or customers by direct or indirect means including but not limited to telephone, correspondence, email, carrier pigeon, smoke signal, etc, etc.” Employers have come to rely on “non-solicitation” clauses such as this as one to protect their business against competition from their departing employees.

However, in the two year’s since the California Supreme Court’s decision in Edwards v. Arthur Andersen, the courts have all but sounded the death knell for the traditional “non-solicitation” clause. In Edwards, the Court adopted a broad rule against covenants not to compete, holding “Noncompetition agreements are invalid under section 16600 in California, even if narrowly drawn, unless they fall within the applicable statutory exceptions of section 16601, 16602 or 16602.5.” As could be predicted, the Edwards decision has given rise to substantial appellate practice in its wake and the dominating trend in these cases is a further narrowing of the post-employment restrictions that can be placed on workers. Indeed, in TRG v. Galante and Dowell v. Biosense, the Second and Fourth Appellate districts have even gone so far as to question the continuing viability of a restrictive covenant based on improper use of the company’s trade secrets.

So, we know where we stand today: courts have accepted a very broad interpretation of Section 16600, many businesses are left with outdated agreements and yet have a strong interest in protecting their business from break-away employees, and workers are in need of guidance about what they can and cannot do when they leave their jobs to work for a competitor or start their own business. The question that remains is, “Where do we go from here?”

For employees, it is critical to be aware of the current limits on post-employment restrictive covenants and the trend toward enforcing these covenants narrowly. Many lawsuits are filed as an overreaction to a former employee’s surprise entry into the marketplace. The protections afforded by the current doctrinal climate create an opportunity to have a dialogue that can head off any disputes arising out of misunderstandings or surprise.

For employers, it may be time to explore a “back to basics” approach that sidesteps the thorny doctrinal issues and tries to find a practical solution by evaluating and implementing preventative policies. Three measures that employers could take to reduce their risk are:

1. Trade secret protection: Regardless of how broadly courts eventually construe Section 16600, they cannot abrogate the California Trade Secrets Act without legislative intervention. Employers should review their trade secrets and confidential information and revise or implement a trade secret protection plan if one does not currently exist.
2. Document handling policies and procedures: Many post-employment solicitation disputes arise out of the usage of customer lists, business forms and other documents that the former employee has kept after separation. Promulgation and enforcement of policies governing the use, storage and transmission of company documents can head off many of these problems.
3. Employee transition policies and procedures: Companies should protect key client relationships by having some form of established transition policy in place Even if client solicitations have been made prior to the employee’s resignation, having an established transition plan can save valuable response time and greatly decrease the odds that a client relationship will be disturbed.

Whether the future brings us new rules for covenants not to compete or simply opens up a free market for employee movement, it’s clear that the “tried and true” ways in which these issues have been approached are undergoing a sea change.

Gregory Wong litigates and provides advice on the entire range of labor and employment issues with a emphasis on trade secrets, restrictive covenants, the hiring and separation of executives, and wage and hour issues. He can be reached at wongg@gtlaw.com.

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