The Labor and Employment Law Blog : Labor & Employment Lawyer & Attorney : Weintraub Genshlea Chediak Law Firm : Sacramento California : Labor & Employment Law Blog

by Lizbeth V. West

In LVRC Holdings, LLC v. Brekka, et. al. (9/15/09), the Ninth Circuit Court of Appeals upheld the trial court’s summary judgment for defendants finding that defendant, Brekka, was “authorized” to use LVRC’s computers while he was employed, and that he did not access the computers “without authorization” under the Federal Computer Fraud and Abuse Act (CFAA) when he emailed documents to himself and his wife prior to leaving LVRC.

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     Although several federal courts in California have previously considered the issue of preemption in trade secret misappropriation cases, the Sixth Appellate District, in K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc. ___ Cal.Rptr. 3d ____ (6th Dist. Mar. 3, 2009), became one of the first (if not the first) California state court to hold that the California Uniform Trade Secrets Act (“CUTSA”) preempts state common law claims based on the same facts as a misappropriation claim. This ruling could have a significant impact on how trade secret misappropriation cases are both pled and litigated in California.

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In VL Systems, Inc. v. Unison, Inc., the Court of Appeal struck down a “no hire” provision contained in a consulting agreement as violating section 16600 of California’s Business and Professions Code. Section 16600 provides “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.” This past summer, the California Supreme Court in Edwards v. Arthur Andersen used the same reasoning to strike down a “non-competition” provision in an employment agreement.

Raymond Edwards was hired by Arthur Andersen as a tax manager in January 1997. His employment by Andersen was made contingent upon his signing a non-competition agreement which prohibited him from working for or soliciting certain clients for a limited period of time following the termination of his employment. The agreement also prohibited Edwards from soliciting Andersen’s employees who he worked with for an 18 month period following the termination of his employment.

During the next five years, Edwards worked for Andersen and moved into the firm’s private client services group where he serviced the accounts for large income/net worth individuals and entities. However, the U.S. government indicted Andersen in connection with the collapse of Enron in March 2002. Andersen announced in June 2002 that it would cease its accounting practices in the United States. Andersen then sold a portion of its tax practice, including Edwards’ Group, to HSBC. Before hiring of any of Andersen’s employees, HSBC required them to execute a “Termination of Non-Compete Agreement” (“TONC”) in order to gain employment with HSBC. The TONC contained a release of any claims that the employee may have against Andersen and was required to be signed by every employee before the deal with HSBC/Andersen went through. Edwards signed his HSBC employment offer letter but declined to sign the TONC. As a result, Andersen terminated Edwards’ employment and HSBC withdrew its employment offer.

In April 2003, Edwards sued Andersen and others for intentional interference with prospective economic advantage and anti-competitive business practices under the Cartwright Act. After Edwards settled with all parties except Andersen, the Court dismissed all but one of the claims against Andersen and later entered judgment in Andersen’s favor on the remaining intentional interference claim. The trial court found that the non-competition agreement did not violate section 16600 because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession.

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Businesses, especially consultants, frequently include a no-hire provision in connection with service or consulting agreements. These provisions are usually intended to prevent the client from soliciting or hiring away the consulting company’s employees. No-hire provisions have two primary goals: First, to protect the employees of one business from being recruited away by the companies they provided services to. The second goal is to help retain customers, i.e., if the client business is able to recruit a consulting business’s employees, there would be no further need for the consulting company’s services.
 

On June 25, 2007, the Court of Appeals for the Fourth Appellate District struck down a “no- hire” provision in VL Systems, Inc. v. Unisen, Inc. (Case No. G037334). Though the VL Systems Court emphasized that there were limitations on the extent of its holding, companies that rely on “no-hire” provisions, and the attorneys who advise them, should take heed of some of the concerns raised by the VL Systems Court.

In 2004, VLS entered into an agreement with Star Trac (a Unisen dba) to provide computer consulting services with regarding a new computer server. The contract was not large and estimated only 16 hours of work by VLS’ consultants. The contract, however, included a 12-month no-hire provision which stated: “BUYER WILL NOT ATTEMPT TO HIRE SELLER’S PERSONNEL. Any hiring or offer of employment entitles but does not require VL Systems, Inc. to immediately cancel the performance period of this agreement.” The “no-hire” provision also contained a liquidated damages clause.

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A California appellate court was recently faced with the issue of when the statute of limitations runs on a claim for trade secret misappropriation against a third party when the plaintiff’s trade secrets are stolen and sold to that third party. On May 30, 2008, the appellate court issued its opinion in Cypress Semiconductor Corporation v. Superior Court (Silvaco Data Systems) and held that the statute of limitations on a cause of action for trade secret misappropriation begins to run when the plaintiff has reason to suspect that the third party knows or reasonably should know that the information in its possession is a trade secret. The appellate court held that the third party’s actual state of mind did not matter for purposes of the running of the statute of limitations.

Silvaco develops and licenses electronic design automation software. This software allows its customers to design their own software products. Silvaco created a software product known as SmartSpice and maintained that its source code was a trade secret.

In late 1998, a former employee working for a competitor incorporated the SmartSpice trade secrets into a product called DynaSpice. Silvaco began to suspect in 2000 that its trade secrets had been misappropriated and sued both the former employee and the competitor. However, Silvaco did not take any action to notify any of its competitor’s customers who had licensed DynaSpice for their own use.

In August 2003, Silvaco and the competitor entered into a settlement agreement and stipulated judgment. The competitor agreed to stop licensing DynaSpice and to inform its customers that the DynaSpice software contained Silvaco’s trade secrets and that they should terminate their use of DynaSpice. Cypress Semiconductor, one of the competitor’s customers, learned of the judgment in late August 2003.
 

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Kevin Gagnon, doing business as “Mister Computer,” alleged that his former customer, Asset Marketing Systems (AMS), infringed his copyright in six computer programs that he wrote for AMS by continuing to use and modify them without his consent and that AMS misappropriated trade secrets contained in the programs’ source code. After AMS terminated its contract with Gagnon, it hired seven of Gagnon’s twelve employees to provide directly to AMS the same services they previously provided to AMS through Gagnon. The Ninth Circuit affirmed summary judgment in AMS’s favor, holding that the non-compete covenants contained in the employment contracts of Gagnon’s former employees were unenforceable under Cal. Bus. & Prof. Code §16600.

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In Edwards v. Arthur Andersen, LLP, Case No. BC294853 (August 7, 2008) the California Supreme Court holds that non-solicitation of customer agreements are per se unenforceable unless they fall within the statutory or other exception permitted under the law. California law has long protected the rights of employees to lawfully pursue any trade or profession. For more than 100 years California law has invalidated any agreement between an employer and an employee which purports to limit or restrict an employee’s ability to work in their trade or profession following the employment. Many other states permit such “non-compete” agreements between employers and employees as long as the restraints on competition are reasonable. In the Arthur Andersen case, the California high court rejected arguments that more narrow agreements – those that limit a former employee’s ability to solicit the former employer’s customers for some specified period of time – did not run afoul of Business and Professions Code §16600 and thus, were valid.

California’s Business and Professions Code §16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void, except as provided in this Chapter [§§16600-16602.5].”
 

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