Cal-Peculiarities: How California Employment Law is Different 2022 Edition

©2022 Seyfarth Shaw LLP  www.seyfarth.com 2022 Cal-Peculiarities | 333  While an employee may secretly incorporate a competing business before departing, the employee may not use the employer’s time, facilities, or proprietary secrets to build the competing business.  Soliciting an employer’s customers may constitute a violation of the employee’s duty of loyalty.  The Supreme Court’s decision in Edwards v. Arthur Anderse n 34 did not address—much less invalidate— an employee’s agreement not to undermine his current employer’s business by surreptitiously competing with it while being paid by the employer.  An employer has no duty to monitor employees for non-compliance with their promise not to compete. Rather, those employees have a duty to disclose their intention to compete. 12.4.2 Covenants not to solicit or raid employees During employment, an employee, even in California, owes a duty of loyalty to the employer—which can include a duty not to solicit co-workers to leave employmen t. 35 A 1985 Court of Appeal decision in Loral v. Moyes upheld a limited agreement by an executive not to solicit his former co-workers for a period of time after his employmen t. 36 Whether such an agreement is valid after the California Supreme Court’s 2008 decision in Edwards v. Arthur Andersen is unclear. A federal court case applying California law, however, held that provisions forbidding solicitation of employees would remain enforceable if they were limited in duration and scope . 37 ( Of course, an anti-raiding provision may be of scant practical comfort to many employers, because former employees—or their new employers—are free to hire people who make unsolicited requests to join the new employer.) A 2018 Court of Appeal decision dealt a blow to employee non-solicitation agreements, however. An employer had its travel nurse recruiters agree that during their employment and for one year thereafter they would not “directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of the Company … to leave the service of the Company.” The employer then sued the former nurse recruiters for breach of contract when they invited their former co-workers to join a competing company. The Court of Appeal, doubting the “continuing viability” of Loral v. Moyes , struck down this non-solicitation provision under Section 16600 . 38 The Court of Appeal reasoned that even if Loral did survive Edwards ’s broad interpretation of Section 16600, the restriction here was not a reasonably narrow restriction with slight effect, but rather would keep the recruiting nurses from competing in their chosen professio n. 39 While this decision might be limited to its facts, employers should carefully consider whether it puts an end to traditional employee non- solicitation agreements. Some federal courts have followed this 2018 Court of Appeal decision and have found non-solicit covenants void, while other courts have continued to apply Loral . Some state trial courts have continued to apply Loral and validate the continued viability of post-termination non-solicit covenants. In any event, restrictions on solicitation during employment remains undisputably valid. 12.4.3 Protection of trade secrets Employers remain free, of course, to contract with their employees to protect employer trade secret s. 40 I t may seem superfluous for an employer to contract for protection of trade secrets, when statutory protection for those trade secrets already exists (see § 12.5). But formal employment agreements could help define trade secrets, provide additional deterrents to misappropriation of trade secrets, provide contractual remedies, and call for special procedures to seek trade secret protection, such as a provision for injunctive relief and a provision for prevailing-party attorney fees, at least for certain employees.