Law Offices of Frankel Goldware Ferber

Enforceability of Covenants Not to Compete in California

2012 October 18
by Richard Frankel

A recent California appellate court decision provides a typical situation relating to the enforceability of a covenant not to compete in California.

Wanke is a company that installs waterproofing systems in Southern California.  Keck and Bozarth were former employees of Wanke.  While employed by Wanke, both signed confidentiality agreements.  They left their employ with Wanke and opened a competing waterproofing company, WP Solutions.

Wanke sued Keck and Bozarth for violating the confidentiality agreement, including misappropriation of trade secrets.

The parties resolved their differences by signing a settlement agreement and, among other things, entered into a stipulated injunction enforceable for five years, whereby Keck, Bozarth and WP Solutions agreed not to contact or solicit any business from certain Wanke customers.  The parties agreed to a liquidated damages provision of $50,000.00 for any violation of the provisions of the Settlement Agreement.  The parties also agreed to increase the liquidated damages by $10,000.00 for a subsequent violation, plus attorneys’ fees and costs.

Sure enough Wanke filed court proceedings that Keck, Bozarth and WP Solutions violated the settlement agreement.

Of particular relevance is the court’s overview of current California law with respect to covenants not to compete and trade secret violations.  The court first reiterated existing California law with respect to the California Supreme Court decision in Edwards v. Arthur Anderson, LLP (2008) 44 Cal.4th 937, where the Supreme Court held that California Business & Professions Code §16600 rendered invalid portions of a non-competition agreement that, among other restrictions, precluded an employee from soliciting clients of his former employer for one year after termination of his employment with the employer.  The Wanke court stated that, “Thus, under Edwards, Business & Professions Code § 16600 generally prohibits the enforcement of a Non-Solicitation Agreement in all cases, in which trade secret exception does not apply.”  The three statutory exceptions to the enforceability of a covenant not to complete include the sale of goodwill or corporate shares, partnership agreements and provisions relating to the dissolution of a limited liability company.

Of particular relevance in the Wanke decision is the fact that the court held that one of the exceptions prohibiting the enforceability of employee non-competition agreements is where the former employer’s confidential trade secret information requires protection.

Therefore, if employers intended to enforce the covenant not to compete based upon confidential trade secret information, it is critical to have a clear understanding of the definition of confidential trade secret information, communicate this definition and the applicable contractual prohibitions to the employee to avoid any misunderstanding.  Moreover, the confidential or proprietary information must be handled, retained and disseminated in a manner that most likely will protect the confidentiality of the information.

Wanke, Industrial, Commercial, Residential, Inc. v. Superior Court (Keck) (Court of Appeal, Fourth Appellate District, October 4, 2012)

2012 Cal. App. LEXIS 1050.

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