By: Lizbeth (“Beth”) West, Esq.
Governor Brown signed a significant number of bills into law during the 2011/12 legislative term, many of which will have a direct impact on almost every California employer, regardless of size. Many laws impose new obligations on employers and prevent employers from engaging in what they may otherwise thought was previously permissible. Below is a summary of the employment-related legislation that goes into effect on January 1, 2012 (except where noted).
It is common in employee defection and trade secret cases for the plaintiff company to rush into court screaming that a robbery is underway that must be halted by the court. The plaintiff cries that, absent the immediate intervention of the court, it will be stripped of any effective ability to compete and may be destroyed or pushed to the very brink of destruction. Courts often respond to such cries. When a business claims that the entirety or a significant portion of a critical business unit has been “stolen” along with critical business information and know how, courts will often take the claims seriously. While it is a truism that “preliminary injunctions are rarely granted,” the truth in that statement more likely lies in grants of preliminary injunction as a percentage of all civil cases filed, rather than as a percentage of preliminary injunctions granted from the population of such applications that are filed. My sense is that most well prepared preliminary injunctions in these cases are granted. When properly supported by declarations from computer experts, business managers, and others who can demonstrate that: (1) that the defendant’s conduct is improper; and (2) that the plaintiff company business operations will be seriously disrupted, courts are often inclined to grant the motions, at least as to a temporary restraining order.
In cases where there has been an exportation of employer information or where a large number of employees have departed one employer to join another, a temporary restraining order or preliminary injunction may not be particularly difficult to obtain. While such applications require great energy by the moving party to prepare a compelling application, the application for such injunctive relief is sometimes the defendant’s first notice that a lawsuit has been filed, and can come as something as a surprise attack. Defendants are almost always at an immediate disadvantage. Within a very short time, responding counsel must promptly identify potential conflicts, organize a defense, effectively investigate the facts, and organize and articulate a response to the plaintiff’s application.
These applications are often accompanied by a request to the court for expedited discovery. When granted, these applications, plus the short response deadlines to respond to a preliminary injunction application, can keep the defendants on the defense and may slow, and on occasion even prevent, a defendant from timely articulating counter claims or developing a sufficient factual understanding to aggressively defend the complaint. If it is true that “speed is the essence of attack” then it is certainly true that speed often assists an applicant for a preliminary injunction in these cases. Nor is speed wholly tactical. Delay can often work against a preliminary injunction application. If weeks or months pass from the alleged misconduct, a court is less inclined to find that there is immediate irreparable injury that must be enjoined.
Are you on Facebook? If your answer is no, you are one of the lone survivors who has managed to hold out from joining the social media world we now live in. There is also a good chance that you won’t be able to hold out much longer, as social media is clearly not going anywhere. Social media has managed to work its way into the lives of teenagers, parents, grandparents, and even people’s pets. Yes . . . people create Facebook pages for their pets!
California’s prohibition on covenants not to compete is well established. The statute that reflects this public policy, Business and Professions Code §16600 generally permits such covenants only in narrowly prescribed circumstances. Those exceptions are all identified by statute at Business and Professions Code §§16601, 16602 and 16602.5. These exceptions permit covenants not to compete when the owners of a corporation, partnership or LLC agree to such restrictive covenants upon the occurrence of certain events. Except for such ownership related transactions, California law makes covenants not to compete unenforceable.
Except in the narrow circumstance where an employee is utilizing confidential or trade secret information to solicit a former employer’s customers, covenants not to solicit customers generally fall under the same prohibition; they are void. Sometimes referred to as the “trade secret” exception, I don’t view it as an exception to the rule at all. California law imposes an independent obligation on current and former employees (or for that matter anybody) not to use their employer’s, former employer’s or anybody else’s trade secret information in a way that violates the provisions of the California Uniform Trade Secrets Act.
But there is a set of circumstances that can arise that will allow a California court to enforce otherwise impermissible covenants not to compete. This “exception” arises as a result of differing law between the states and the federal overlay of constitutional principles that require each state to respect the judgments and law of sister states. There are circumstances where a California court may find itself helpless to enforce California’s prohibition against covenants not to compete. This situation can arise when an employer executes agreements with its workers containing choice of law and forum selection provisions requiring any dispute under the employment agreement (and the determination of the enforceability of a covenant not to compete against a California resident) be decided under the law and in the courts of another jurisdiction.
A chain of state and federal cases shows the struggle over this issue. In Advanced Bionics v. Medtronics (2002) 29 Cal.4th 297, the California Supreme Court reversed lower courts, which had enjoined a court proceeding in another state, on the grounds that that state’s law was offensive to California’s fundamental public policy prohibiting covenants not to compete. Several federal courts are in accord. Google v. MicroSoft and Swanson v. T Mobile USA, both demonstrate the willingness of federal courts to find that choice of law and choice of forum provisions do not offend a fundamental California public policy.
In Swanson v. T Mobile, a former employer sought to enjoin competing conduct by a former employee by injunction issued by a Washington State Court. The former employee sought an injunction in California (where he was resident) based on the invalidity of the covenant. The former employer removed to federal court and the federal court found that the forum selection provisions were enforceable and inoffensive to California public policy. Although the Court noted that the former employee could urge the Washington Court to apply California law, there was no basis to enjoin the proceeding in the Washington Court. At least as to employers with the reach and the resources to litigate in forums outside of California, the choice of law/forum “exception” can, at least practically speaking, swallow the no enforcement of covenants not to compete rule.
Recently, the California legislative fixes to this “exception” have been proposed. AB 267 (Swanson) would have made void an unenforceable as against public policy, any provision in an employment contract that requires an employee, as a condition of obtaining or continuing employment, to use a forum other than California, or to agree to a choice of law other than California law to resolve any dispute with an employer regarding employment related issues that arise in California. While proposed, it appears that bill remains in committee in the California Legislature.
Provisions of this kind continue to be a significant source of litigation. Recently the brewers of Sam Adams beer sued a former employee and his new employer. Both the former employee and the new employer (the Brewers of Anchor Steam Beer) are residents and operate in California. The lawsuit was filed in Massachusetts and is based on an agreement containing a covenant not to compete and provisions that require that Massachusetts law be applied and that any litigation concerning it take place in Massachusetts.
Making California the seventh state in the country to enact such a law, Gov. Jerry Brown signed Assembly Bill 22 on October 9, 2011. As reported here in a post dated August 18, 2011, this law bars most employers (except certain financial institutions) from using pre-employment credit checks in the hiring process. It remains to be seen if Occupy Sacramento or Occupy Wall Street protesters will decry the exemption in this law as yet another example of government showing undue favoritism to the financial sector. Either way, prudent employers who wish to perform or commission credit checks of employees or job applicants should consult legal counsel so as to avoid costly lawsuits.
