Trade Secret Exception to Section 16600

California’s pro-employee public policy compromises the employer’s ability to compete.  For example, as an employee gains importance to the employer, the employer must teach the employee the trade and skill of the employer’s operation.  In California, the employee is under no obligation to stay with the employer but is allowed to switch companies or even start his/her own business.  To mitigate against such situations, some employers require employees to enter into an agreement or contract wherein the employee promises not to use the employer’s trade secrets after termination of employment.  This furthers California’s public policy of protecting trade secrets, but conflicts with the public policy favoring employee mobility and use of his/her trade and skill.

In 2008, the California Supreme Court held that Section 16600 is a bright line rule.  Edwards v Andersen.  Even a contract that partially restrains a person’s ability to work but does not entirely prohibit the employee’s ability to work is still void.  Even a narrowly tailored restraint in view of a local geographic region and short time period cannot be saved.  However, the California Supreme Court expressly stated the opinion did not decide whether a trade secret exception existed within the framework of Section 16600.

The following case is an explanation of trade secret protection in light of Section 16600.  In The Retirement Group v. Galante, the Court reasoned that misappropriation of trade secrets is tortious conduct and not a breach of contract.  Section 16600 voids any contract that restrains a person from working.  If the restraint is based on other grounds such as tortious conduct, then the restraint does not violate Section 16600.  As such, the Court held that employees may be enjoined from utilizing an employer’s trade secret (i.e., tortious conduct) since it is wrongful independent of any contractual obligation.

In The Retirement Group, an employee started a new business which competed directly with his former employer.  During litigation, the employer obtained an injunction from the court that prevented the former employee from utilizing information found only on the employer’s computer system.  (“Category 3”).  The employer also obtained a broader injunction that prevented the former employee from soliciting any customer of former employer to the employee’s new business.  (“Category 4”).  Upon appeal, the Court held that the scope of the Category 3 injunction is appropriately tailored to protect the former employer’s trade secrets.  However, the scope of the Category 4 injunction is too broad because it prevents the employee from competing even if the former employee is not utilizing the former employer’s trade secrets.

Accordingly, Section 16600 must be considered when developing contracts and other policies to protect one’s trade secrets.

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