Volume I, Number 8 ● An E-Publication of the Los Angeles County Bar Association ● June 2008
YOUR FIRST ENCOUNTER WITH A NON-COMPETE IN CALIFORNIA
AND THE DELICATE DISTINCTION BETWEEN SOLICITATION AND ANNOUNCEMENTS
by Michael D. Young and Sayaka Karitani*
Generally non-competes are unlawful in California. The Business and Professions Code (Section 16600 et seq.) and myriad California cases make this abundantly clear. But there are a few exceptions, and where there are exceptions, there are creative employers and employees (and their attorneys) seeking to explore the limits of those expections.
Trade Secret And Narrow-Restraint Exceptions
Announcements (Good) v. Solicitations (Bad)
Conduct Constituting "Mere Announcements"
Conduct Constituting "Improper Solicitation"
TRADE SECRET AND NARROW-RESTRAINT EXCEPTIONS:
Exception: an employer that maintains its customer and client relationships as trade secrets can prevent its employees from later leaving the company and “misappropriating” those trade secrets by soliciting those clients for a competitor. But can an employer obtain the same non-solicitation protection where its customers and clients are not protected as trade secrets? In other words, can an employer subject its employees to a general non-solicitation obligation in California so that regardless of whether the customer list is a trade secret, the employee cannot change employment and begin soliciting the employer’s customers? Currently, under the law in California, the answer is…maybe.
On the one hand, these types of non-solicitation agreements restrict competition by identifying a certain segment of the marketplace as “off limits” to the sales efforts of former employees. Hence, they would appear to run afoul of California’s general public policy (found in B&P Section 16600) disfavoring such non-competition arrangements. On the other hand, the restriction on competition is very limited, precluding only solicitation , and it applies to only a small segment of the market (i.e., only to those specific customers of the former employer). Employers have some rights, after all, even here in California.
Not surprisingly, courts attempting to balance these competing interests have not necessarily agreed on how to do it. Nonetheless, there are a number of courts (primarily in the Ninth Circuit) that have adopted a “narrow restraint” exception, permitting the use of limited non-solicitation agreements, despite Section 16600’s otherwise strict prohibition on non-competition agreements. The propriety of this “narrow restraint” exception is currently before the California Supreme Court (fully briefed and ready for argument) in Edwards v. Arthur Andersen, Supreme Court No. S147190. (The Edwards opinion should not impact an employer’s ability to still protect its customer lists as trade secrets. The issue before the court is whether a general non-solicitation agreement is valid in California under the judicially created “narrow restraint” exception where the customer list is not a trade secret.)
So for now, as of the date of this article, a non-solicitation agreement is lawful in California where the employer’s customer lists are protected as trade secrets, and may be lawful even where that list is not a trade secret. (Confused yet?)
Announcements (Good) v. Solicitations (Bad)
For those of you who are asked by employees or employers to provide guidance as to their non-solicitation agreements, it is important to understand what the limitations of these agreements are in California. And as you should suspect by now, the rules are not crystal clear.
Whether an employer’s non-solicitation agreement is protecting a trade secret customer list or a non-trade secret customer list, the restriction on the employee-turned-competitor is fairly limited: The former employee can be prohibited from soliciting company clients, but cannot be barred from announcing the individual’s new employment affiliation to those very same clients. In other words: Solicitation, bad; Announcement, good.
Does this sound like legal legerdemain? Or is there really an identifiable and practical difference between soliciting a client and announcing a new affiliation with a competitor? Certainly at the outer edges there appears to be a conceptual difference between:
I hope you would agree that the former is “solicitation” and the latter merely an “announcement” of new employment affiliation. But what about that murky, blurry area in the middle? How much more can the new employee of Company Y say without crossing the line into forbidden Solicitation Zone? And what if the client, in response to the announcement, asks to do business with the employer’s new company?
| a) “Hi, I used to work for you at Company X. I now work at Company Y and we are much better than X. You should give me your business over here at Company Y and we will provide you with much better service at much cheaper prices. And I’ll throw in a free iPod.”
| b) “Hi, I now work at Company Y with an address and phone number of….”
The courts, while all too happy to provide us with plenty of words in an effort to distinguish between improper solicitation and proper announcements , have only been marginally successful at providing any real practical guidance.
Let’s start at the beginning. In this employee-friendly state, an employee’s right to announce his or her new employment is considered “basic to an individual’s right to engage in fair competition,” even with the understanding that the purpose of announcing a change of employment or the commencement of self-employment is the hope that customers will follow. (American Credit Indemnity Co. v. Sacks, 213 Cal.App.3d 622, 636 (1989).) This right to announce one’s new affiliation has been upheld even where the announcements are made to clients on a protected trade secret client list! (In the eyes of The Law, “announcement” is not considered a misuse or misappropriation of a trade secret client list, while “solicitation” is.) (Sacks, 213 Cal.App.3d at 634-36; Hilb, Rogal and Hamilton Ins. Servs. of Orange County, Inc. v. Robb , 33 Cal.App.4th 1812, 1822 n.6 (1995).)
California courts have routinely held that the willingness to discuss business, and receive business, when invited to do so by the former employer’s customers is not solicitation. In other words, if the employee makes an “announcement,” and in response the customer suggests doing business together, The Law (or a non-solicitation agreement) will not stand in the way. Customers get to do business with whomever they want, trade secret list or non-solicitation agreement be damned. (Theodore Ins. Agency, Inc. v. Morady , 2006 WL 2130295, at *8 (Cal. App. Aug. 1, 2006).)
So what exactly constitutes improper solicitation in California? The California Supreme Court has provided plenty of words to define “solicitation” (our personal favorite being “importune”):
But what does this all mean? Is it like Potter Stewart’s famous observations about obscenity; you’ll know it when you see it? Not much guidance in that for the business world. And so, as a public service, we have surveyed some of the case decisions in this area of the law to see if they provide any better delineation between right and wrong behavior in this context. We found the following (among others):
|“[t]o ask for with earnestness, to make petition to, to endeavor to obtain, to awake or excite to action, to appeal to, or to invite. . . . It implies personal petition and importunity addressed to a particular individual to do some particular thing . . . . It means: To appeal to (for something); to apply to for obtaining something; to ask earnestly; to ask for the purpose of receiving; to endeavor to obtain by asking or pleading; to entreat, implore, or importune; to make petition to; to plead for; to try to obtain.” (Aetna Bldg. Maintenance Co. v. West , 39 Cal.2d 198, 204 (1952).)
Conduct Constituting "Mere Announcements"
Conduct Constituting "Improper Solicitation"
- Announcing in Person: In-person announcements do not necessarily cross the line to become solicitations, so long as the message remains one of identifying the new employment and does not evolve into a sales pitch. In Aetna v. West, the Supreme Court held that a former employee’s announcements were lawful and proper where the employee “visited one firm three times without invitation, but ‘he did not solicit business.’” Aetna Bldg. Maintenance Co. v. West , 39 Cal.2d 198, 204 (1952).
- Asking Customer to Visit: Sending a flyer to 25-35 customers of the former employer, along with a map of the new place of employment, was held permissible where the flyer did not mention the former employer, did not disparage the former employer, did not compare the two businesses, and did not offer discounts or other inducements to the flyer’s recipients, but did welcome a personal visit. The “announcement” stated: “Visit me in the new location….[¶] I’ll be available … for your automotive services. Please ask for Andre.” The Court noted: “Simply asking a potential customer to visit does not equate with importuning.” (There’s that word again.) Dalla, Inc. v. Petrossian , 2004 WL 909241, at *3 (Cal. App. Apr. 29, 2004) (unpublished).
- Responding to Customers: Since the very “purpose of announcing a change of employers or the commencement of self-employment is the hope that customers will follow,” former employees who announce (but refrain from soliciting) are indeed entitled to accept new business from the customers of their former employer. Theodore Ins. Agency, Inc. v. Morady, 2006 WL 2130295, at *8 (Cal. App. Aug. 1, 2006) (unpublished). As explained by the Supreme Court in Aetna: “Merely informing customers of one’s former employer of a change of employment, without more, is not solicitation. Neither does the willingness to discuss business upon invitation of another party constitute solicitation on the part of the invitee. Equity will not enjoin a former employee from receiving business from the customers of his former employer.”
While we suspect that this little tour of some of the announcement/solicitation cases has done little to clarify the blurry line between the two concepts, it has hopefully raised an awareness of the issues and provided a cautionary flag for both employees and employers (former and new) to be diligent and cautious in situations where employees are moving from one competitor to another. It is a mine field for the unwary, and you don't want to be caught stepping in the wrong place.
- Offering To Discuss Business: A former employee crossed the line where she sent a letter informing her former employer’s customers of an “interesting competitive alternative” she offered at her own newly formed company as compared to her former employer’s policies; invited inquiries about her new company’s policy; and indicated she would be “happy to discuss it in detail when they are ready to renew.” The employee followed up this letter with a personal phone call to each client; and provided specific competitive information to a major customer. The Court determined that by inviting inquiries and offering to discuss her policies in detail, the former employee “personally petition[ed], importune[d] and entreat[ed]” these customers to call her for information regarding better products and assistance, and this amounted to a solicitation. American Credit Indemnity Co. v. Sacks , 213 Cal.App.3d 622 (1989).
- Noting the Differences Between Companies: Where the former employee went beyond the written announcement, and made personal contact with certain former customers, and as part of that “discussed with the customers the potential transfer of the customers’ accounts, the differences between [the former employer] and [the current employer], and, in at least one conversation, why [the new employer] is better than [the former employer],” the court held the employee to have crossed the line into the impermissible Solicitation Zone. Merrill Lynch, Pierce, Fenner & Smith v. Garcia , 127 F. Supp.2d 1305, 1306 (C.D. Cal. 2000).
- Personally Visiting Clients With Proposals: While a personal visit to a former employer’s client might not cross the line where the employee is careful to announce only, bringing a business proposal to the meeting will almost certainly be considered solicitation. MAI Systems Corp. v. Peak Computer, Inc ., 991 F.2d 511 (9th Cir 1993).
- Having Others Make The Contact: Having other employees at the new company make the contact with the prior employer’s customers does not insulate the conduct. It is still impermissible solicitation. Corporate Express Office Products, Inc. v. Martinez , 2002 WL 31961458, at *3 (C.D. Cal. Mar. 8, 2002) (unpublished)
- Asking To Continue To Service Clients: A former employee made telephone calls to former customers; followed this with personal visits; sent letters announcing the formation of his own business, describing the services he could provide, and offering to serve the customer’s needs; drafted service agreements that proposed to charge the same prices as the former employer; and asked these customers if they wanted him to continue servicing their networks. What likely started out as a proper announcement quickly crossed the line. Luce v. Hanrahan , 2005 WL 705380, at * 10 (Cal. App. Mar. 29, 2005) (unpublished).
- Lawyers mess up too: In one case, former partners of a law firm accessed their firm's database over five months before resigning, printing out over 2,000 client names, addresses, and phone numbers. They then engaged in a “campaign to solicit [the former firm's] clients, contacting at least 40 clients by telephone without offering them a choice of counsel.” In determining that the attorneys had misappropriated the former firm's trade secrets through their active solicitation, the court also considered evidence that demonstrated that the firm lost 144 clients to the attorneys over the next 12 months when they had only typically lost one or two clients a month prior to that. Reeves v. Hanlon , 33 Cal.4th 1140 (2004).
*About the Authors:
Michael D. Young is an intellectual property and employment litigator with the Los Angeles law firm of Weston, Benshoof, Rochefort, Rubalcava & MacCuish, LLP, and a mediator with Judicate West in Southern California, focusing on the resolution of intellectual property, employment, and other complex business and commercial disputes. He is also a fellow with the International Academy of Mediators, and an adjunct professor of negotiation and mediation at the University of Southern California Law School. Mr. Young co-authors a blog on intellectual property ADR issues at www.ipadrblog.com.
Sayaka. Karitani is an associate with the firm of Weston, Benshoof, Rochefort, Rubalcava & MacCuish, LLP. Her practice focuses on complex business disputes, including franchise, contract and employment/labor matters.