Although California has a long-standing prohibition on noncompetition agreements, as codified in Business and Professions Code Section 16600, courts have historically allowed such agreements where necessary to protect an employer's trade secrets. A recent California appellate decision, however, has called into question the continuing validity of the so-called "trade secrets" exception. In Dowell v. Pacesetter, Inc., the court refused to recognize an employer's overly broad non-compete and non-solicitation covenants and further expressed doubt as to whether any non-compete covenant, no matter how narrowly tethered to the protection of trade secrets and confidential information, could be enforceable under California law.
The agreement in dispute in Dowell prohibited employees, for 18 months after leaving the employer, from using the employer's "confidential information" to compete against the employer and from soliciting any customer with whom the employees had contact in the year before termination. When several employees left to join a competitor, the new (hiring) employer filed a lawsuit against the former employer seeking a court declaration that the covenants were unenforceable. In response, the former employer argued that the restrictions were valid because they were narrowly tailored to protect trade secrets and confidential information.
The California Court of Appeal affirmed the trial court's ruling that the restrictions were void as a matter of law. In responding to the defendant's argument that a "trade secret exception" applied to the covenants, the court expressed doubt about the "continued viability of the common law trade secret exception to covenants not to compete." However, the court did not resolve the issue because it determined that the covenants in question were not limited to trade secret protection and thus were too broad to be enforceable. The court also affirmed the trial court's determination that the defendant's use of the unenforceable non-compete restrictions violated California's unfair competition law.
In light of the Dowell decision, California employers who wish to utilize non-compete restrictions to protect against trade secret misappropriation should ensure that the restrictions are appropriately tailored to cover the protection of trade secrets; any restrictions which impose broader restrictions may subject employers to liability under California's unfair competition laws.