California’s Policy Against Non-Compete Agreements Does Not Necessarily Shield An Employee’s Actions During His Or Her Employment
California’s Policy Against Non-Compete Agreements Does Not Necessarily Shield An Employee’s Actions During His Or Her Employment

In Techno Lite, Inc. v. Emcod, LLC, the California Court of Appeal recently affirmed the finding that an employee can be liable for fraud when said employee violates his promise not to compete with his employer while still employed.  Though public policy in California places strict limitations on non-compete agreements after an employee has left employment, this shield was never meant to become a sword by which an employee could undermine his employer with impunity even before his employment ends.

Background

Appellants Scott Drucker (“Drucker”) and Arik Nirenberg (“Nirenberg”) worked for respondent Techno Lite, a company engaged in selling lighting transformers, which had been purchased by and was owned by Neil Olshan (“Olshan”) and respondents Stefan Poenitz (“Poenitz”) and David Tour (“Tour”) as of 2003.  While Drucker and Nirenberg worked for Techno Lite, they also opened and ran their own company, appellant Emcod, LLC, beginning in 2006.  Though Emcod also sold transformers, Techno Lite consented to Drucker’s and Nirenberg’s operating Emcod while working for Techno Lite, based on their promise that they would run Emcod on their own time, and that Emcod would not compete with Techno Lite.

In 2012, Emcod began selling to Techno Lite customers the same products Techno Lite was selling — a fact to which Drucker admitted.  Drucker claimed Emcod did this because Techno Lite did not have the resources to fill customer demand, so Emcod stepped in to “maintain and keep the account.”  Drucker claimed Emcod was able to sell to these customers when Techno Lite could not, due to Drucker’s personal connections.  However, Drucker did not tell Techno Lite’s owners that Emcod was selling to their customers, and Emcod kept the profits from these sales.

In 2013, several e-mails were sent to Techno Lite’s customers asking them to replace Techno Lite with Emcod, with one e-mail stating “All of our accounts are going to be changed to the new name, Emcod. Consequently, we want to clean up all the old invoices.”  In another e-mail Drucker stated, “We have to be very careful who we contact until we leave here. … We can only go after accounts we trust.”  After Olshan died, Poenitz and Tour offered Olshan’s shares of Techno Lite to Drucker for free.  Instead, Drucker offered to purchase Techno Lite from Poenitz and Tour.  Subsequent negotiations failed and Drucker and Nirenberg resigned from Techno Lite on December 13, 2013.  A lawsuit followed, in which Drucker, Nirenberg, and Emcod were found liable for fraud.

A Promise Not to Compete with an Employer While Employed Is Not Void as a Matter of Law

Appellants argued the trial court could not find them liable for fraud because the false promise (not to compete with their employer) on which the fraud was based was void as a matter of law under Business and Professions Code section 16600 (hereinafter “Section 16600”).  Section 16600 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Section 16600 was meant to ensure that every citizen retained the right to lawfully pursue any lawful employment and enterprise of their choice, and to encourage open competition and employee mobility.

The Court of Appeal rejected Appellant’s argument, holding that Section 16600 has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends.  The Court was unable to locate a case in which Section 16600 was held to invalidate an agreement not to compete with one’s current employer while still employed by that employer.  The Court of Appeal stated further that under California law, an employer is entitled to its employees’ undivided loyalty.

Thus, while an employee generally may prepare to lawfully compete with his employer, provided he does so on his own time and with his own resources, an employee may not use his employer’s time, facilities, or its confidential, proprietary, or trade secret information to build a competing business.  The Court of Appeal noted that just as no principle of public policy authorizes an employee to assist his employer’s competitors, no principle of public policy authorizes an employee to become his employer’s competitor while still employed.

Conclusion

Despite California’s strict limitations on non-compete agreements, Section 16600 does not necessarily bar claims against a former employee where the claims are based on an employee’s conduct during his employment.  Thus, a thorough analysis of an employee’s actions during his or her employment is necessary to preserve potential claims against the now-competing former employee.  If you have been left scratching your head after relying on the promises of a former employee in good faith, promptly contact the attorneys at Atkinson, Andelson, Loya, Ruud & Romo to explore your options and protect your company.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

© 2020 Atkinson, Andelson, Loya, Ruud & Romo

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