Not long after my article discussing the interplay between the Defend Trade Secret Act (DTSA) injunction provisions and California non-competition law, a federal district court in the Northern District of California opined on this exact issue in Henry Schein, Inc. v. Cook, No. 16-CV-03166-JST, 2016 WL 3418537 (N.D. Cal. June 22, 2016).
In Schein, the court issued a preliminary injunction under the DTSA and state trade secret law prohibiting the former employee, Cook, from accessing or using trade secrets that she e-mailed to herself, but declined to enjoin her from contacting or doing business with customers of her former employer Henry Schein, Inc. (HSI). The court based its ruling on Cal. Bus. & Prof. Code Section 16600 (Section 16600), which prevents courts from enforcing contractual non-compete provisions, and on its determination that HSI failed to demonstrate that an injunction was “necessary” to prevent trade secret misappropriation, as required by the “trade secret exception” to Section 16600.
Plaintiff HSI specializes in the marketing of medical, dental, and veterinary supplies to healthcare professionals and organizations. Defendant Cook was a sales consultant at HSI and had signed a Confidentiality and Non-Solicitation Agreement, wherein she agreed to “neither copy nor take any [confidential] material upon leaving Company’s employ” and to not “solicit the patronage of any past or then-current customer of the Company.” After working at HSI for over 10 years, Cook left to work for one of HSI’s competitors. HSI alleged that prior to leaving the company, Cook “began to loot HSI’s confidential, proprietary, and trade secret documents and information with the apparent goal of diverting HSI’s customers.” Cook used her work email account to forward to her personal email account confidential HSI customer practice reports, equipment inventory reports, price quotations for prospective customers, and equipment proposals on which HSI was working. On the day she resigned, Cook logged into HSI’s computer system with her company-issued laptop thereby updating it with substantial, specific, customer-related sales and ordering data – and then did not return the laptop for two weeks. Soon thereafter, HSI applied for a temporary restraining order (TRO) against Cook, which the court granted in part.
The TRO enjoined Cook from: (1) “directly or indirectly accessing, using, disclosing, or making available” any of HSI’s confidential documents, data or information; (2) “directly or indirectly violating or interfering with the confidentiality obligations” she had to HSI; and (3) “directly or indirectly, soliciting, continuing to solicit, initiating contact with, or accepting business from, any HSI customers whose accounts were assigned to her while she was employed by HSI.”
In analyzing the non-solicitation agreement, the court began by quoting Section 16600 which states, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The court found that the non-solicitation clause at issue – which prohibited Cook from soliciting customers of HSI for twelve months after leaving her employment – was similar to non-solicitation clauses invalidated by the California Supreme Court.
The court explained that while some cases have recognized a trade secret exception to Section 16600, a party seeking to invoke that exception must demonstrate that the non-competition clause is “necessary” to protect the trade secrets at hand. The court noted that even though HSI had reviewed a substantial volume of the materials that Cook emailed to her personal account and downloaded, it had not tied those materials to any specific HSI customer, much less any HSI customer that Cook contacted on behalf of her new employer. Accordingly, the court held that HSI did not make the requisite showing to invoke the “trade secret exception” to Section 16600.
The court further concluded that, notwithstanding the non-solicitation clause, HSI had not shown that an injunction preventing Cook from interacting with HSI customers was necessary to prevent continued misuse of its trade secrets. The court explained that although it may not enjoin solicitation of business based on a contractual clause – which would violate Section 16600 – it may enjoin such activity based on tortious conduct. Thus, a former employee may be barred from soliciting customers if the solicitation effort involves utilizing another’s trade secret information in violation of the law.
Distinguishing the precedents cited by HSI, the court noted that Cook had not shown an unwillingness to obey court orders requiring compliance with trade secret law, and HSI had not offered specific evidence that Cook was utilizing HSI’s trade secret information to solicit customers. However, the court warned that:
[I]f Cook indeed misappropriated confidential information regarding HSI customers, and further solicited the business of those customers after leaving HSI, one could certainly infer that she has used that confidential information in the course of her solicitation. Discovery may reveal such facts.
(emphasis added). Notably, the court found HSI’s declaration in support of a preliminary injunction was insufficient because it did not “offer evidence of trade secrets that were misappropriated with regards to any particular customer that Cook has contacted since her resignation.” (emphasis added).
In sum, HSI made a strong showing that Cook took trade secret information from HSI when she resigned, and the court enjoined her from using that information. However, because HSI did not prove that Cook used the misappropriated trade secrets to solicit clients, the court did not enjoin Cook from contacting HSI’s clients. Employers should take note of this high evidentiary bar in the interplay between the DTSA and state non-competition law and of the limited relief that may result when the bar is not met.