We all may know that California does not permit enforcement of most noncompete agreements. Despite this broad prohibition, the federal court’s recent decision in Richmond Technologies, Inc. v. Aumtech Business Solutions, (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 noncompete agreements in California.
Richmond Technologies provided enterprise resource planning software for financial service companies who provide credit card terminals to merchants. Richmond entered into a “teaming agreement” with Aumtech, which developed software for Richmond and maintained the resource planning modules for Richmond’s customers. The agreement contained a confidentiality and nondisclosure agreement that prohibited Aumtech from disclosing or using confidential information, soliciting Richmond’s employees for one year, or entering into agreements with Richmond’s customers for one year following the term of Aumtech’s employment with Richmond.
Earlier this year, one of Richmond’s employees, Jennifer Polito, resigned her employment with Richmond 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 Richmond. Aumtech offered the same services to Richmond’s customers and began to encourage those customers to terminate their contracts with Richmond and to sign up with Aumtech. Specifically, Ms. Polito allegedly contacted one customer directly and participated in a trade show marketing Aumtech’s services. Before she left, Ms. Polito deleted emails with Aumtech and made it difficult for Richmond to continue to service their customers. 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 Richmond; and (2) enjoin Aumtech from competing against Richmond in violation of the nondisclosure 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 noncompetition 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 Richmond’s customers and utilizing confidential information (the court recognized that customer preferences and specialized requirements may be trade secrets under California law).
This case highlights that deception and misconduct can be instrumental when considering whether to attempt to enforce a noncompetition agreement and to enjoin unfair competition. The fact that the court granted an injunction is not surprising in light of the alleged wrongful conduct and deceptive behavior. This case makes it evident that, even in California, the law does not permit unfair competition.