A new Ninth Circuit case, Asset Marketing Systems, Inc. v. Gagnon, 2008 WL 4138181 (Sept. 9, 2008), acknowledges (at least in dicta) that there is a trade secrets exception to Business and Professions Code Section 16600. 

In the case, Gagnon, an independent contractor who developed computer programs for AMS, a field marketing organization, alleged, among other things that AMS had misappropriated his trade secrets that were contained in the programs’ source code.

The Ninth Circuit rejected Gagnon’s claims that AMS misappropriated his trade secrets. The Ninth Circuit affirmed the district court’s determination that Gagnon had granted AMS an implied, unlimited license to retain, use, and modify the software, thus destroying any trade secret status the code might have had.

In rejecting Gagnon’s trade secret claim, the Court affirmed the district court’s holding that the noncompetition agreements signed by Gagnon’s employees were invalid. Gagnon contended that even if AMS obtained an implied license, it still misappropriated his trade secrets that were contained in the programs’ source code by hiring away his employees in violation of their employment agreements. One of the provisions in the employees’ agreements was an agreement not to engage in any employment or personal contractual agreement for AMS for twenty-four months without written consent from Gagnon.

Citing the California Supreme Court’s recent decision in Edwards v. Arthur Andersen LLP, 189 P.3d. 285, 288 (2008), the Ninth Circuit stated (arguably in dicta) that noncompetition agreements in California are invalid unless necessary to protect an employer’s trade secrets. The California Supreme Court in Edwards, however, specifically did not address what it called the so-called trade secret exception to Bus. & Prof. Code § 16600 and rejected the Ninth Circuit’s narrow restraint exception to section 16600 (the “narrow restraint” exception interpreted section 16600 to allow noncompetition agreements where departing employees were barred from pursuing only a small or limited part of a business, trade or profession). According to the Ninth Circuit, the non-competition agreements that Gagnon had his employees execute “were no longer enforceable” because they were no longer necessary to protect Gagnon’s trade secrets against AMS.

In this first post-Edwards published Ninth Circuit decision regarding section 16600, the Court did not provide any specific analysis concerning the nature of the trade secrets exception and what one must show to make defensible use of it. The Court’s dicta appears to suggest that non-competition agreements executed “to protect” an employer’s trade secrets will be enforceable. But as with most things legal, with trade secrets, the devil is in the details. What exactly the Court meant by a non-competition agreement to protect trade secrets is unclear. Further, mere assertions in employee/employer noncompetition agreements that the agreement has been executed “to protect” trade secrets without more is unlikely to withstand challenge.