We all know that California does not permit enforcement of non-compete agreements. Despite this broad prohibition, the federal court’s recent decision in Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11-CV-02460-LHK, 2011 WL 2607158 (N.D. Cal. July 1, 2011) confirms another overriding general rule: courts do not like deceptive behavior of former employees – even in California. This decision makes it clear that when faced with egregious facts, you may have to think twice about the enforceability of non-compete agreements in California.
Plaintiff Richmond Technologies provides enterprise resource planning software for financial service companies who provide credit card terminals to merchants. The plaintiff entered into a “Teaming Agreement” with Aumtech, which developed software for plaintiff and maintained the resource planning modules for plaintiff’s customers. The agreement contained a confidentiality and non-disclosure agreement, which prohibited Aumtech from disclosing or using confidential information, soliciting plaintiff’s employees for one year, or entering into agreements with plaintiff’s customers for one year following the term of Aumtech’s employment with plaintiff.
Earlier this year, one of plaintiff’s employees, Jennifer Polito, resigned her employment with plaintiff and immediately joined Aumtech as its President. Significantly, she allegedly used three different programs to delete data from her company-issued computer before returning the computer to plaintiff. Before she left, Ms Polito deleted emails with Aumtech and made it difficult for plaintiff Richmond to continue to service its customers. Aumtech offered the same services to plaintiff’s customers and began to encourage those customers to terminate their contracts with plaintiff and to sign up with Aumtech. Specifically, Ms. Polito allegedly contacted one customer directly and participated in a trade show marketing defendant’s services. When Richmond learned of this activity, it canceled its agreement with Aumtech and filed a motion for a temporary restraining order that would (1) compel Aumtech to release source codes to plaintiff; and (2) enjoin Aumtech from competing against plaintiff in violation of the non-disclosure agreement.
In deciding the motion, the court recognized that Cal. Bus. & Profs. Code Sec. 16600 broadly prohibits “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” However, even though the court acknowledged the applicability of this section, the court also recognized that there is a long line of cases in California holding that former employees may not misappropriate the former employer’s trade secrets to unfairly compete with the former employer. Thus, the court determined that non-competition agreements are enforceable when necessary to protect an employer’s trade secrets, either as an exception to the statute, or to enjoin an independent wrong (either a tort or violation of California’s Unfair Competition Law). The court enjoined Aumtech from contacting plaintiff’s customers and utilizing confidential information (the court recognized that customer preferences and specialized requirements may be trade secrets under California law) until a preliminary injunction hearing scheduled for August 1, 2011.
This case highlights that deception and misconduct can be instrumental when considering whether to attempt to enforce a non-competition agreement and to enjoin unfair competition. The fact that the court granted an injunction is not surprising in light of the defendants’ seemingly wrongful conduct and deceptive behavior. This case makes it evident that even in California, the law does not permit unfair competition.