California Court of Appeal Questions Viability of Trade Secrets Exception to California's Broad Prohibition Against Noncompete Covenants

* Co-authored with Kathryn T. McGuigan.

In Edwards v. Arthur Andersen, LLP, 44 Cal.App. 4th 937 (2008) the California Supreme Court adopted an expansive interpretation of California Business & Professions Code §16600, holding that §16600 prohibits employee non-competition agreements unless the agreement falls within a statutory exception which are non-competition agreements associated with certain business sales transactions, dissolution of partnerships, or termination of a member’s interest in a limited liability company. The Edwards Court specifically rejected the “narrow restraint” exception adopted by the Ninth Circuit and which no California court had endorsed, finding that even limited restraints on post-termination competition are unlawful under California law.

However, the Court was careful to note that its opinion did not invalidate restraints necessary to protect trade secrets, stating that it was not required to address the applicability of the so-called trade secret exception to section 16600 because it was not germane to the claims raised by the employee. Edwards, supra, 44 Cal.4th at 946, fn. 4.

On November 19, 2009, the California Court of Appeal in Dowell v. Biosense Webster, Inc., No. B201439, in refusing to enforce broad and expansive noncompete and nonsolicitation clauses in employment agreements, did not reach the trade secret exception issue either. The Dowell Court stated in dicta that it doubted the continued viability of the common law trade secret exception to covenants not to compete, but was not resolving the issue because the noncompete and nonsolicitation clauses in the agreements before it were not narrowly tailored or carefully limited to the protection of trade secrets, but were so broadly worded as to restrain competition. The Dowell Court left open the question as to whether or to what extent courts will enforce agreements more narrowly tailored to protect trade secrets.

Even if a court does not enforce a nonsolicitation covenant tethered to even a narrow definition of trade secrets, an employer will still have protection under common law and the California Trade Secrets Act if the employee is using trade secret information to solicit. Given the direction that the California courts appear to be headed, however, employers in California should weigh the value of including any nonsolicitation covenant against the risk created by the inclusion of such a covenant, which may violate public policy.