In an attempt to sidestep California’s laws undermining non-compete clauses, many businesses employ “non-solicitation of customers” agreements to protect themselves from employees who may wish to form a competing business after leaving their employment. However, California case law has found such agreements to be unenforceable unless necessary as a means of protecting trade secrets. In this blog, we analyze the pitfalls of “non-solicitation of customers” agreements.
Customer identities and the trade secret exception
California law recognizes the need of a business to protect its trade secrets. Protection of trade secrets in enshrined in the California Civil Code, and non-compete agreements that aim to protect trade secrets have been recognized and enforced by the California courts.
Non-solicitation of customers clauses aim to make use of the trade secret exception by relying on customer lists as being trade secrets. However, in Application Group, Inc. v Hunter Group, Inc., the court ruled that although a customer list could qualify as a trade secret in certain circumstances, that is not always the case and a plaintiff must prove that its customer list meets the legal definition of a trade secret.
Businesses that deploy non-solicitation clauses that rely on the trade secret exception should consider whether their customer list does in fact qualify as a trade secret. If it does not, the non-solicitation clause exposes them to potential unfair business practice claims under the California Business and Professions Code.
Narrow restraint and Edwards v Arthur Anderson
Another pitfall with non-solicitation clauses is drafting them too broadly, in terms of the geographical area in which they apply and the number of months or years that they are operative. In Gluska, the employee was subject to a non-solicitation clause relating to customers within a 40-mile radius. The court ruled that the clause effectively operated as an outright non-compete clause, and was void.
Note that even provisions that are narrowly drafted in terms of duration and geographic area could be unenforceable. In Edwards v Arthur Anderson, a tax manager for Arthur Anderson had signed a non-solicitation agreement effective for 18 months after the end of his employment with the firm. When Mr. Edwards’ employment was terminated for refusing to sign an agreement waiving all claims against Arthur Anderson, Edwards filed suit on the basis that the non-solicitation agreement constituted unfair competition and interference with prospective economic advantage. Arthur Anderson argued for a narrow restraint exception to the ban on non-compete clauses, in which only provisions that totally prohibit an employee from a particular line of work are void, while clauses with limited effect could be enforceable. The Supreme Court of California rejected the notion of a narrow restraint exception, affirming that even non-solicitation clauses with limited restraint on an employee’s ability to compete may be void.