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Your Legal Corner - Client Alert Blog

Employee Non-Solicitation Clause May Be Enforceable in California

Written By: Melissa C. Marsh, Esq., California Attorney, April 2012 Add to Favorites
Although covenants not to compete and non solicitation clauses are generally unenforceable in California, on March 21, 2012, in Pyro Spectaculars North Inc. v. Souza, a judge in the Eastern District of California issued an injunction against an employee who had been soliciting the customers of his former employer. This case illustrates that when a California employer implements the right procedures to protect its customer’s lists and data, a court may issue an injunction to stop a former employee from engaging in unfair competition and misappropriation of trade secrets.

Facts.

Pyro Spectaculars North filed a lawsuit against one of its former employees (Souza), claiming: (1) violation of the federal Computer Fraud and Abuse Act; (2) violation of California Penal Code Section 502, (3) breach of contract, (4) breach of loyalty, (5) breach of the implied covenant of good faith and fair dealing, (6) misappropriation of trade secrets, (7) tortious interference with prospective economic relationship and economic advantage, (8) unfair business practices and (9) conversion.

Thereafter, Pyro Spectaculars North filed a motion seeking a preliminary injunction to enjoin is former employee from soliciting its customers.

The U.S. District Court for the Eastern District of California granted the injunction enjoining Souza for a period of six (6) months from directly or indirectly initiating any contact with any current customer of Pyro Spectaculars North in Northern California or Hawaii with whom Souza had contact, or for whose accounts he had responsibility, while employed by Pyro Spectaculars North.

"4. Defendant Steven Souza is enjoined, for a period of six months from the date of this order, from directly or indirectly initiating contact with any current Northern California and Hawaii PSI customers with whom he had contact or for whose accounts he had responsibility while employed by PSI, for the purpose of encouraging, inviting, suggesting, or requesting transfer of their business from PSI. Notwithstanding the foregoing, if a PSI customer initiates contact with defendant, defendant shall be permitted to respond to and accept business from the customer. Defendant shall also be permitted to continue dealings with former PSI customers with whom defendant, J&M Displays, and/or Hi-Tech FX, LLC already have an existing contract for services. Defendant shall further be permitted to engage in marketing efforts directed at the pyrotechnics market as a whole, such as attending trade shows and posting general advertisements."
Court's Reasoning in Pyro Spectaculars North.

The judge based his decision on the specific facts before him, including his findings that Souza:

  1. worked for the plaintiff for 17 years as an account executive,
  2. signed a confidentiality agreement in which he agreed that "all account or customer lists, trade secrets, unique display designs or knowledge gained are the exclusive property of Pyro Spectaculars Inc.," and agreed "not to divulge any knowledge, trade secrets, formulas, patents or unique display designs to anyone";
  3. in contravention of the confidentiality agreement, Souza downloaded, retained and used more than 60 files from his employer’s hard drive (a forensic computer analysis revealed this);
  4. admitted to using Pyro's information in contravention of the confidentiality agreement; and
  5. shortly after resigning began soliciting his former employer's customers to move their business to his new employer.
Souza argued that the information relating to his former employer’s customers was not "confidential" within the meaning of the California Uniform Trade Secrets Act (CUTSA) because: (1) most of the information was publicly available and could have been discovered through time and research and (2) Pyro Spectaculars North failed to keep the information secure. The court rejected both arguments. According to the Court, the information Souza downloaded and used went well beyond that available to the general public (it was “a virtual encyclopedia of specific PSI customer, operator and vendor information at a competitor's fingertips, allowing the competitor to solicit both more selectively and more effectively without having to expend effort to compile the data."). The Court further found that while Pyro Spectaculars North’s security measures were far from perfect, it did maintain reasonable security methods to protect its confidential customer information.

Citing the California appellate court's decision in Retirement Group v. Galante, 176 Cal. App. 4th 1226 (2009) ("former employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee's new business if the employee is utilizing trade secret information to solicit those customers ... thus it is not the solicitation of the former employer's customers, but is instead the misuse of trade secret information that may be enjoined" the judge in Pyro Spectaculars North determined that the specific facts of this case warranted the issuance of a "narrow, time limited" preliminary injunction enjoining the former employee from soliciting the plaintiffs current customers in a specific region with whom he had contact for a period of 6 months.

Conclusion.

This case which directly opposes the holding of Retirement Group v. Galante, 176 Cal. App. 4th 1226 (2009) (effectively barring any non-solicitation restrictions under California Business and Professions Code section 16600) provides clear guidance of the evidence needed to support the issuance of an injunction to prevent a former employee from soliciting away a company's customers.

You can read the Court's full decision in Pyro Spectaculars North here.


Tags: california non solicitation clause, california nonsolicitation clause, Pyro Spectaculars North
Posted In: Employment Law News 


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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.