Another Non-Solicit Bites the Dust

The Court of Appeal took up a complex lawsuit involving claims and cross-claims of unfair competition, including strong agreements not to compete or solicit and choices of law and forum clauses. The Court expanded on the decision this summer in The Retirement Group v. Galante, posted here.

Basically, Dowell, other employees and their new employer, St. Jude, sued Biosense Webster, which was attempting to enforce a non-compete agreement, which included broad non-solicitation clauses. The Court of Appeal agreed with the trial court that the agreements were unenforceable. Here is some language from the opinion:

Biosense contends that the clauses are valid because they were tailored to protect trade secrets or confidential information, and as such satisfy the so-called trade secret exception, citing cases such as Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429–1430; Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1462; Metro Traffic, supra, 22 Cal.App.4th at p. 860; and American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1322. Plaintiffs counter that in light of our Supreme Court’s recent decision of Edwards, supra, 44 Cal.4th 937, a common law trade secret exception no longer exists.The Court in Edwards concluded that section 16600 “prohibits employee noncompetition agreements unless the agreement falls within a statutory exception.” (Edwards, supra, 44 Cal.4th at p. 942.) . . . .

* * *
Although we doubt the continued viability of the common law trade secret exception to covenants not to compete, we need not resolve the issue here. Even assuming the exception exists, we agree with the trial court that it has no application here. This is so because the noncompete and nonsolicitation clauses in the agreements are not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition. ...
Biosense argues that the clauses in the agreements are narrowly tailored to protect trade secrets and confidential information because they are “tethered” to the use of confidential information, and are triggered only when the former employee’s services for a competitor implicate the use of confidential information. As such, to the extent that no confidential information was disclosed or made known to Dowell and Chapman during their employment with Biosense, the noncompete clause would never be triggered. But this argument ignores the broad wording of the agreements. The noncompete clause prohibits an employee from rendering services, directly or indirectly, to a competitor where those services could enhance the use or marketability of a conflicting product through the use of confidential information to which the employee had access at Biosense. “Confidential information” is broadly
defined as information disclosed to or known by the employee, including such
information as the number or location of sales representatives, the names of customers, customer preferences, needs, requirements, purchasing histories or
other customer-specific information. Given such an inclusive and broad list of confidential information, it seems nearly impossible that employees like Dowell and Chapman, who worked directly with customers, would not have possession of such information. The prohibition here is not unlike the noncompete clause found facially invalid by the court in D’Sa, supra, 85 Cal.App.4th at p. 930. . . . .

We also reject the argument of Biosense that the nonsolicitation clause is narrowly tailored to protect trade secrets and confidential information. The same argument was rejected by the Galante court, which noted: “However, Edwards rejected the claim that antisolicitation clauses could be exempt from section 16600 if the conduct covered by such clauses fell within the ‘narrow-restraint’ exception discussed in Campbell (Edwards, supra, 44 Cal.4th at pp. 948–950), and we decline TRG’s implicit invitation to engraft that exception onto this case.” (Galante, supra, 176 Cal.App.4th at p. 1241.) Moreover, the clause at issue here goes well beyond prohibiting active solicitation by prohibiting departing employees from selling or rendering any services to Biosense customers or directly or indirectly assisting others to do so—even if it is the customer who solicits the former employee. (See
Morris v. Harris (1954) 127 Cal.App.2d 476, 478 [invalidating restraint that
prohibited employee from providing services to former customers who sought him
out without any solicitation].)

St. Jude, though, lost on its attempt to enjoin Biosense from enforcing its non-compete agreement against all employees in California. The court said that St. Jude had no standing under the UCL to enforce an injunction in favor of plaintiffs not before the court.

Biosense cross-claimed against St. Jude for "raiding" by hiring Dowell and other employees. The Court of Appeal again affirmed summary judgment against Biosense, holding there was no evidence of unlawful conduct by St. Jude, which by default has the right to hire away St. Jude employees.

Biosense argued St. Jude used similar agreements to prevent competition by its own former employees. Therefore, Biosense reasoned, St. Jude came into court with "unclean hands." No sale. St. Jude's alleged unfair practices with respect to their own employees did not go to the heart of the matter with respect to Dowell's suit against Biosense. Therefore, unclean hands did not apply.

So, lots to read. Bottom line, though, is that a non-solicit probably is not going to be enforced except as a remedy for trade secret violations, not as a prophylactic measure where there is no finding of actual or threatened misappropriation under the UTSA. The agreement here was too broad, but there does not seem to be much room left for clauses that prohibit solicitation merely because an employee is exposed to "confidential" information and might use them some day.

The case is Dowell v. Biosense Webster, Inc. and the opinion is here.