California has a strong public policy that allows employees to change jobs, seek employment, or otherwise practice their trade or skill. This policy is embodied in Business and Professions Code Section 16600 (“Section 16600”). Under Section 16600, all contracts that restrain an employee’s ability to work are void unless the contract is based on a dissolution of partnership or sale of business.
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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