Protecting Employers’ Current Employees and Client Lists

In today’s world of business, there is an astonishing trend when it comes to long term relationships between employers and employees. According to the Bureau of Labor Statistics, “of jobs that workers began when they were 18 to 24 years of age, 69 percent of those jobs ended in less than a year and 93 percent ended in fewer than 5 years. Among jobs started by 40 to 48 year olds, 32 percent ended in less than a year and 69 percent ended in fewer than 5 years.” The reality of the situation is sometime in the near future, one of your employees will be leaving your company in favor of another company. As an employer, there are critical steps you must take in order to protect your interests.

Employers attempt to use various types of employment agreements to guard against any malicious or dishonest behavior by an ex-employee that may have adverse effects on a company. Within these contracts, there are two covenants that are often used as a means of protection:

1. Covenants not to solicit employees 
2. Covenants not to use company confidential information

The State of California has traditionally leaned on the side of employees with regard to limitations on former employees; however, there are legal and enforceable alternatives despite this inclination.

It is important that an employer be clear and specific when including these covenants (or non-compete provisions) in their agreements with their employees. California Courts have made it clear they will not rewrite an overly broad non-compete provision to make it valid. The burden is on the employer to draft a provision that is legally enforceable (see Kolani v. Gluska (1998) 64 Cal.App.4th 402, 408).

Covenants Not to Solicit Employees

A common practice in the business world is for a competitor or former employee to attempt to “raid” another company’s employees. Under ordinary circumstances, California Law does not prohibit this behavior, even from former employees. The exception to this rule is the presence of a non-solicitation clause.

In Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, Loral Corporation brought a claim against Robert Moyes, a former executive officer, claiming he breached his termination agreement by soliciting Loral Corporation’s employees to work for Moyes’ new employer. The termination agreement provided that Moyes would “not now or in the future disrupt, damage, impair or interfere with the business of [Loral Corporation] whether by way of interfering with or raiding its employees, disrupting its relationships with customers, agents, representatives or vendors or otherwise.” (174 Cal.App.3d at p. 274). Despite this clause, Moyes later offered jobs to two key employees of Loral Corporation, who would eventually accept Moyes’ employment offer. This clause included an enforcement limitation of one year. As a result, the court ruled this non-interference covenant was valid stating: “The restriction presumably was sought by plaintiffs in order to maintain a stable work force and enable the employer to remain in business. This restriction has the apparent impact of limiting [the defendant’s] business practices in a small way in order to promote [the employer’s] business. This non-interference agreement has no overall negative impact on trade or business.” (174 Cal.App.3d at p. 280).

It is important to note that these non-solicitation agreements can be used so long as they are reasonably limited in time and scope. The key aspect of Loral was that the restriction had “no overall negative impact on trade or business” (174 Cal. App. 3d, 280). California has always erred on the side of caution when it comes to restrictions of worker mobility or restrictions on business (see California Business and Professions Code Section 16600). Employers should make sure they have clearly defined and limited non-solicitation clauses before requiring they be signed by their employees.

Covenants Not to Use Company Confidential Information

Another type of non-compete clause California Courts have deemed enforceable is in regards to an employer’s trade secrets. Clauses that restrict the use or disclosure of a company’s trade secrets, either during or after the term of employment, have been found to be enforceable (See Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal. 2d 239, 242).

A company’s confidential information is protected so long as it pertains to a trade secret. Trade secrets can include things such as sales methods, advertising strategies, and manufacturing processes.  A common trade secret that is oftentimes overlooked, and subsequently disclosed by former employees, is a client or customer list. In American Credit Indemnity Company v. Lola N. Sacks (1989) 213 Cal.App. 3d 622, 633-34, a former employee did just that. Lola Sacks became an underwriting agent for American Credit Indemnity Company (“ACI”) on February 5, 1979 and by 1987, she had become one of the top agents. Due to this expertise, in 1988, Sacks resigned from ACI in favor of starting an independent insurance agency. As customary at the time, ACI required Sacks to sign a confidentiality agreement with respect to the protection of its client list, the expiration dates of ACI policies, lists of all leads for potential business, claims histories, and other information concerning the special needs of clients. Despite signing this agreement, Sacks used ACI’s client list to contact approximately 50 policyholders she had personally serviced informing them of, and soliciting to, her new business venture. In response, ACI filed a lawsuit and the courts ruled in favor of ACI stating: “We hold the [Uniform Trade Secrets Act] protects ACI’s customer list as a trade secret.” (213 Cal.App.3d at p. 625).

California Courts have consistently recognized and sympathized with the employer’s great effort and expense of creating, compiling, and maintaining company trade secrets.  As a result, non-compete agreements in regards to trade secrets may be enforceable.  As to client lists, one court noted: “The names of the customers of a business concern whose trade and patronage have been secured by years of business effort and advertising, and the expenditure of time and money, constituting a part of the goodwill of a business which enterprise and foresight have built up, should be deemed just as sacred and entitled to the same protection as a secret of compounding some article of manufacture and commerce.” (Klamath-Orleans v. Miller (1978) 87 Cal.App.3d 458, 465). Ex-employees, therefore, “are not allowed to exploit information which his employer compiled at great expense and which represents a valuable business asset.” (Id. at p. 464).

 Summary

Although there are many different ways employers can protect themselves against the potential damage of former, and sometimes disgruntled, employees, non-solicitation and confidentiality provisions  can be carefully inserted into an agreement with an employee. It would be advantageous to contact an attorney to review your current employee agreements to ensure they are not only enforceable but also sufficient in protecting your interests.

Disclaimer

This entry does not give specific legal advice about your specific legal problem. No text or graphic contained in this entry is to be or should be used or relied upon as legal advice. This entry does not create an attorney-client relationship. If you want specific legal advice about your particular legal issues, or if you want to create an attorney-client relationship, you need to retain the Law Offices of Ron A. Stormoen by a signed written retainer agreement.