What Every Business Lawyer Needs to Know about California Employee Non-Compete and Non-Solicitation Agreements

By Steven Kesten, Esq.

Steven Kesten advises California employers and employees. 

www.marincountylegal.com

    While speaking to an auditorium filled with hopeful high school students, President Obama recently observed that we are an information based economy. Going forward, said the President, it is the companies and the individuals who possess information vital to modern business that will thrive and survive.  To those of us living in the bay area, the President’s words come as no surprise.  As lawyers, we are often called upon to help our clients retain and protect their trade secrets and other vital information that provides  them with a competitive advantage in the local and global marketplace.   We are also living in an increasingly mobile society. When employees leave their employment, as they frequently do, they walk out the door with a head full of your client’s trade secrets and other information vital to the ongoing success of the business.  A vital question which naturally arises is: How do you protect your client?
   
    If you’ve been confused about how to properly counsel your business client with regard to this important matter, there is little wonder why.  Until 2008 the California Court of Appeals and the Ninth Circuit were not exactly in sync about whether or not a departing employee can directly compete with the business they are leaving.  Whether or not a departing employee could be restrained from soliciting customers or clients and to what degree seemed like a question that had been resolved, but not really.  Beginning nearly 140 years ago, the Civil Code contained a statute rendering void any contract that restrained an individual from engaging in any lawful profession, trade or business. The language of the old statute was guided by fundamental public policy that it is better for the overall economy to allow a departing employee to work or start a business.  This public policy is now expressed in Business & Professions Code § 16600. 

    Departing employees often start competing businesses and these new enterprises create jobs which, in turn, fuel the California economy. If nothing else, we can’t have the unemployment rolls filled with people who are ready, willing and able to work and would gladly engage in productive activities but for a contract clause prohibiting their employment.   As a friend and colleague recently commented, California hasn’t grown to be the fourth largest economy in the world by preventing its citizens from engaging in gainful employment.  The language of the statute and the philosophy behind the public policy seem clear but, as we know, sometimes there are exceptions to the rule, at least for a while. 

    Several Ninth Circuit cases including, Campbell v. Trustees of Leland Stanford Jr. University Campbell 817 F.2d 499, held that “narrow restraint exceptions” to the rule against non-compete agreements were acceptable.  These cases left lawyers and clients pondering such questions as whether a non-compete provision in an employment or severance agreement was narrowly tailored enough to qualify as a “narrow restraint exception”.  Was the prohibition applicable to a small enough geographic area, we would ask?  Would a non-compete agreement limited to a particular industry or sub-set of an industry be sufficiently limited in scope to qualify?  The answers weren’t clear until late in 2008.

    In the case of Edwards vs. Arthur Andersen LLP 44 Cal. 4th 937 (2008), the California Supreme Court finally provided a definitive answer and your employer clients probably won’t like it.  The Edwards decision isn’t really new news.  In fact, in Chamberlain v. Augustine 172 Cal. 289 (1916), the court already expressed the rule that partial restraints violate the rule against non-compete agreements and that was nearly one hundred years ago.  Edwards doesn’t make new law but it does shut the door, once and for all, on those who would seek to restrain a past or present employee from seeking employment in his or her chosen field and in their chosen geographic area.

    As part of his employment, Edwards was required to sign an agreement which prevented him from performing work for Andersen’s clients for 18 months after he left the giant accounting firm.  The agreement also prevented him from soliciting clients of the firm for 12 months following his departure.  Naturally, under the narrow exception rule, Andersen argued that Edwards was free to work in his chosen field and the restraint on his employment was sufficiently limited to fall within the exception.  The California Supreme Court disagreed.

    California has now firmly established the rule against non-compete agreements except in limited circumstances, again.   Bare in mind, agreements that protect trade secrets remain enforceable as do agreements that restrain the employment of someone selling a business or partnership interest in a business.   The Edwards case does nothing to limit a business’ right to protect its trade secrets under Civil Code 3426, the Uniform Trade Secrets Act.  Trade secrets include not only secret formulas and processes, the idea of trade secret protection is broad enough to include customer lists and other data used by a business to promote itself or sell its products.   When drafting employment and severance agreements, the attorney must be careful to include a restraint on the use of trade secret information without simultaneously restricting an employee’s ability to be employed or limiting the employee’s business prospects.

    While California has now solidified the rule against non-compete and non-solicitation agreements, many other states continue to allow enforcement of broadly drafted non-compete and non-solicitation agreements.  California has long ago rejected the notion that a California citizen working in the State of California could have their employment governed by the laws of another state because of a choice of law provision contained in an employment agreement.  Other states deal with the issue differently.  If you represent an employee who has signed an employment agreement with a choice of law provision that requires the entire agreement including the non-compete agreement to be interpreted according to the laws of a state other than California, and a dispute has arisen, you may have to race to the court house to obtain a ruling in California that the choice of law provision is unenforceable.  

    At the beginning of the twenty-first century, the court in Armendariz vs Foundation Health Psychare Services, Inc. 24 Cal. 4th 83 (2000), established the minimum procedural and substantive requirements that must be present for an arbitration agreement between and employee and employer to be enforceable in California.  If you represent an employee that has signed an employment agreement containing a provision requiring arbitration to be conducted outside of California according to the rules and laws of another state, whether or not the agreement is valid was not made clear by the Edwards case.  We can only hope that the courts extend the same degree of protection against non-compete and non-solicitation agreements in these situations but, that question has yet to be decided.  After all, shouldn’t all California employees be entitled to the same protections even when they work for companies based outside the state?  Employers from other states or countries who enjoy the robust nature of our California economy should not be able to circumvent decades of legal evolution with a single clause in a contract many employees fail to read and when they do, fail to unerstand. 

    What to do?  If you represent a business that has or is considering trying to implement or enforce a non-compete or non-solicitation agreement, review the agreement to determine if the client is protecting trade secrets or if it is an attempt to restrain an employee from working for a competitor or starting a competing business.  Your business client may not like the news you report so be prepared.  Despite the ruling in Edwards, non-compete and non-solicitation agreements drafted during the preceding years are still out there and employers have been sharing information with employees assuming the information was protected.

    If you represent an employee, the over-reaching employer’s attempt to restrain your client’s employment may, in itself, be a tort worth pursuing.  While you consider going on the offensive, you should take care to examine whether or not your client has or intends to use the trade secrets of his/her former employer while working for a new employer or in pursuit of their own business.  If you’ve been contacted by the out of state employer’s legal counsel, and believe a problematic arbitration clause and choice of law provision may be enforceable in the employer’s home state, consider a preemptive filing seeking declaratory relief invalidating the troublesome clause.
   

December 12, 2008
RE: EMPLOYMENT AND BUSINESS UPDATE FOR 2009

Dear Friends, Clients and Colleagues:

Each year brings a new set of laws, regulations and scams. The number of new statutes, ordinances, regulations and case law continue to grow and impose an ever greater burden on businesses, especially small businesses and professional practices. Below is a brief review of some of the more important new laws that may impact your business or profession.

E-Verify

You may have heard about E-Verify, the computerized system by which an employer can match an employee’s identification with the federal government’s database of workers eligible for employment based on citizenship status. E-Verify is free to employers and, in the future, will be mandatory for all new hires. The system is reported to have about a 10% mistake factor. Because of the likelihood of mistake, you may want to delay signing-up for the E-Verify system.

Beginning summer of 2008, the Department of Homeland Security and Department of State are issuing “passport cards” which may be used to verify employment status.

Minimum Wage

California State minimum wage is not scheduled to rise in 2009 and will remain at $8.00. The Governator is also encouraging the introduction of other new laws to reduce the amount of wage and hour litigation, including litigation concerning meal and rest breaks violations that have plagued businesses. For the last eight years the courts have been terribly inconsistent on questions concerning an employer obligations to provide meal and rest breaks and how they may be implemented.

San Francisco minimum wage will go up to $9.79 per hour beginning January 1, 2009. Even if your office is located outside San Francisco, employees working within City limits must be paid this City specific minimum wage.

Computer Professionals: Labor Code Section 515.5 has been amended. If you employ professional computer oriented employees, effective 2009, the hourly amount they must be paid to be exempt from overtime is $36.00 per hour or an annual salary of $75,000.00. This amount will increase with the CPI January 2009. It is important to keep in mind that not all computer related employees qualify for the exemption under the duties test.

Meal and rest break compliance requirements remain unsettled in California since the Brinker case was granted review by the Supreme Court. To be safe, meal and rest breaks should be enforced and non-exempt employees must confirm, in writing, each day they take or don’t their breaks. It is essential that employees sign off on a notice confirming the company’s meal and rest break policy. It is the employer’s legal obligation to keep records on meal and rest breaks taken and these records should be kept in storage for a minimum of four years. Effective 2008, the statute of limitations concerning meal and rest break violations is four years. Not only are employers penalized for violating this component of the Labor Code, additional penalties can be added under Labor Code Section 203 which equal thirty days of wages for each affected employee.

Duty free meal breaks must be at least 30 minutes long and must be provided during the 5th hour of work, or before. Ten minute rest breaks should be made mandatory during the mid-morning and mid-afternoon. Though there is an exception to this rule for construction companies under very limited circumstances, the exception is so narrow it is best to follow the general rule.

The Brinker case also held that employers are liable for wages if they know or should know that employees are working off the clock. If you have employees who arrive at work early to avoid peak rush hour traffic and begin working before the regular workday or, if you have employees that run errands for the business before arriving at the office or after the official workday, this is compensable time.

The Starbucks case made it abundantly clear that business owners and employees holding a supervisory or management position may not take any portion of pooled tips even if they provide direct service to the patron.

Bradstreet vs. Wong confirmed the decision in Reynolds vs. Bement which held that officers and directors are not personally liable for corporate debts to employees for unpaid wages. Some of you might recall that prior to 2006 when the Reynolds case was decided, officers and directors were held liable.

What the court gives with one hand, it takes away with the other. This new case also opened the door for personal liability of the officers and directors. If the plaintiff/employee can pierce the corporate veil, the officers and directors may, in fact, be liable for unpaid wages.

What to do? Make certain you are following all mandatory corporate formalities so that your corporation cannot be pierced. This includes holding regular annual and special meetings, adhering to corporate bookkeeping requirements and otherwise following typical corporate formalities. If you haven’t held a corporate meeting in the last 12 months, it’s time to call my office.

In Lonicki vs. Sutter Health the court held that an employer cannot interfere with an employees outside employment, including employment with a competitor.

In Edwards vs. Arthur Anderson the court held that any non-compete signed by an employee is void as a matter of law. The court threw out the old defense of “narrow restriction”. However, trade secret agreements and confidentiality agreements remain enforceable provided they do not contain a non-compete component.

If your company provides computers, PDA’s, cell phones or other communication devises, check the company’s written privacy policy. If your company doesn’t have a privacy policy, now is the time to create one. In Quon v Arch Wireless Operating Company the court directed employers to be explicit regarding the scope of privacy extended to employees.

In the Quon case the court reversed a long line of cases that held that employees have no reasonable expectation of privacy with regard to the computers, cell phones and other electronic devises furnished by the employer. This is likely to be an area the court will explore again in the company years since more and more of our lives are spent using a variety of electronic devises that store conversations, text messages, emails and other forms of communication.

What to do? Make certain you have an explicit and comprehensive privacy policy signed by every employee.

The Americans With Disabilities Act or ADA has been revised and those revisions become effective January 1, 2009. The new law is titled the ADA Amendments Act. The provisions of the ADA have been greatly expanded in a variety of ways including a new more extensive list of covered disabilities. The new law excludes consideration of mitigating measures and expands the definition of “major life activity”.

What to do? Employers should be cautious of every decision to terminate, demote or taking any other adverse employment action against a covered employee. Most court watchers expect this newly expand law to generate a great deal of litigation in the coming years as the courts try to make sense of the greatly expanded provisions.

Family Leave has been expanded so that an eligible employee or spouse, son daughter, parent or next of kin of a covered service member is entitled to a total of 26 weeks of Family Medical Leave to care for the service member.

Scams:

Many of you continue to report the receipt of correspondence from companies offering to sell annual board of director meeting minutes to your company. The charges typically range from $100-200.00 for which you receive a fill in the blanks form, nothing more. These solicitations arrive in official looking envelopes that appear to come from the Secretary of State. Don’t fall for this expensive scam.

Because of the decision in Bradstreet vs. Wong referred to above, it is even more critical that your annual and special meeting minutes be done properly and that efforts be made to prevent anyone from piercing the corporate veil to attack you personally in litigation.

The above isn’t an exhaustive review of all the changes in the law that are of significance to your business and you can expect that as we wind through 2009, new cases will be decided and new laws passed by the state legislature and Congress that are of significance to your business or professional practice.

Best wishes for a healthy and happy new year.

Sincerely yours,

Steve

IMPORTANT NEW CASE

Summer 2008

Pearson Dental Supplies, Inc. v. Superior Ct. of Los Angeles County, No. B206740

In a claim against former employer for age discrimination under California's Fair Employment and Housing Act (FEHA), petition for writ of mandate to confirm arbitration award was granted where the one-year limitation period did not unreasonably restrict plaintiff's ability to vindicate his rights under the FEHA.

This is a remarkable case because it reverses a trend in California law that began with the Armendariz and Circuit City cases.

In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), the Court held that California would uphold an arbitration agreement given certain factors. Specifically, the Court held that mandatory employment arbitration agreements are enforceable if they provide for a neutral arbitrator, allow for more than minimal discovery, direct the arbitrator to issue a written award with findings and conclusions, permit the recovery of all types of relief and remedies that are available in a civil action, and do not require the employee to bear unreasonable arbitration costs.

In Duffield v. Robertson Stephens & Co., 144 F. 3d 1182 (9th Cir. 1998), cert. denied, 525 U.S. 982, 996 (1998), the Ninth Circuit held that, under the Civil Rights Act of 1991, employers may not require employees to waive their Title VII right to a judicial forum.

After eight years of reasonably consistent decisions, along comes Pearson Dental Supplies which held that an employee can agree to shorten the time within which an employee can file for arbitration. This case is amazing because it permits an employer and employee to dramatically reduce the time within which an employee can seek legal redress. This reverses an eight year trend.

What to do?

The short answer is probably nothing needs to be done right away. I expect there will be another case to come along in the near future that will curtail or reverse this holding.

Here is a new Memorandum from the California Labor Commissioner explaining how Deputy's in the Division of Labor Standards Enforcement are to interpret the new Brinker case which, as many of your know, explains an employer's obligation with respect to meal and rest breaks.

State of California DIVISION OF LABOR STANDARDS ENFORCEMENT - HQ MEMORANDUM

TO: DLSE Staff

FROM: Angela Bradstreet, Labor Commissioner

Denise Padres, Deputy Chief

Robert Roginson, Chief Counsel

DATE: July 25, 2008

SUBJECT: Binding Court Ruling on Meal and Rest Period Requirements


On July 22, 2008, the California Court of Appeal issued its decision in Brinker Restaurant Corp. v. Superior Court of San Diego County (Hohnbaum), (2008) ___ Cal.App.4th ___ , 2008 WL 2806613. The court in Brinker decided several significant issues regarding the interpretation of California’s meal and rest period requirements. The decision is a published decision, and its rulings are therefore binding upon the Division of Labor Standards Enforcement (DLSE).


The decision in Brinker included the following rulings regarding the interpretation of California’s meal and rest period requirements:
Meal Periods
The court held that Labor Code ¤ 512 and the meal period requirements set forth in the applicable wage order mean that employers must provide meal periods by making them available, but need not ensure that they are taken. Employers, however, cannot impede, discourage or dissuade employees from taking meal periods.1


The court rejected the so-called “rolling five-hour” requirement as being inconsistent with the plain meaning of Labor Code ¤ 512 and the applicable wage order.2 An employer must make a first 30-minute meal period available to an


Memo to DLSE Staff re Binding Ruling on Meal and Rest Period Requirements July 25, 2008 Page 2
hourly employee who is permitted to work more than five hours per day, unless


(1) the employee is permitted to work a “total work period per day” that is six hours or less, and (2) both the employee and the employer agree by “mutual consent” to waive the meal period.3 The court also found section 512 to plainly provide that an employer must make a second 30-minute meal period available to an hourly employee who has a “work period of more than 10 hours per day” unless (1) the “total hours” the employee is permitted to work per day is 12 hours or less, (2) both the employee and the employer agree by “mutual consent” to waive the second meal period, and (3) the first meal period “was not waived.”4
Employers are not required to provide a meal period for every five consecutive hours worked.5 The court held that the employer’s practice of providing employees with an “early lunch” within the first few hours of an employee’s arrival at work did not violate California law, even though that would mean that the employee might then work in excess of five hours without an additional meal period.6


Rest Periods


The court held that the rest period requirements set forth in the applicable wage order mean that employers must provide rest periods, but need not ensure that they are taken. Employers, however, cannot impede, discourage or dissuade employees from taking rest periods.7
The court held that employers need only authorize and permit rest periods every four hours or major fraction thereof and they need not, where impracticable, be in the middle of each work period.8 The court interpreted the phrase “major fraction thereof” to mean the time period between three and one-half hours and four hours and not to mean that a rest period must be given every three and one-half hours.9 In so doing, the court rejected as incorrect a 1999 interpretation by the Labor Commissioner that the term “major fraction thereof” means an employer must provide its employees with a 10-minute rest period when the employees work any




time over the midpoint of each four hour block of time.10 The court ruled that the rest periods must be given if an employee works between three and one-half hour and four hours, but if four or more hours are worked, it need be given only every four hours, not every three and one-half hours.


The court also ruled that the applicable wage order rest period provisions do not require employers to authorize and permit a first rest period before the first scheduled meal period. Rather, the applicable language of the wage order states only that rest periods “insofar as practicable shall be in the middle of each work period.” Accordingly, the court concluded, as long as employers make rest periods available to employees, and strive, where practicable, to schedule them in the middle of the first four-hour work period, employers are in compliance with that portion of the applicable wage order.


The court relied upon the plain meaning of the Labor Code and applicable wage order provisions in making its determinations. The court found persuasive the reasoning in the federal district court decisions in White v. Starbucks (ND Cal. July 2, 2007) 497 F.Supp.2d 1080 and Brown v. Federal Express Corp. (CD Cal. Feb. 26, 2008) 2008 WL 906517, and concluded that employers need not ensure meal periods are actually taken, but need only make them available.13


The court distinguished the decision in Cicairos v. Summit Logistics, Inc. (2006) 133 Cal.App.4th 949, concluding that the facts in Cicairos established that the employer failed to make meal periods available to employees and that the court there only decided meal periods must be provided, not ensured.


All staff must follow the rulings in the Brinker decision effective immediately and the decision shall be applied to pending matters. Please ensure that any wage claim filed with DLSE that has a meal or rest period issue is reviewed by your Senior Deputy prior to making any final determination on its merits.

Independent contractor versus employee

Prohibited Employment Practices

The Fair Employment and Housing Act specifies:

* Prohibits discrimination in all aspects of employment including hiring, termination and terms and conditions.

* Prohibits harassment of employees or applicants and requires employers to take all reasonable steps to prevent harassment from occurring.

* Requires that all employers provide information to each of their employees describing the forms of sexual harassment, its illegality, the internal and external complaint processes and legal remedies.

* Requires employers to reasonably accommodate employees or job applicants with disabilities in order to enable them to perform the essential functions of the job.

* Requires employers to provide leaves of up to four months to employees disabled because of pregnancy or childbirth.

* Requires an employer to provide reasonable accommodations requested by an employee, with the advice of her health care provider, related to her pregnancy, childbirth, or related medical conditions.

* Requires employers of 50 or more persons in a 75 mile radius to allow eligible employees to take up to 12 weeks leave in a 12-month period for the birth of a child, the placement of a child for adoption or foster care, for an employee's own serious health condition, or to care for a parent, spouse, or child with a serious health condition. (Employers are required to post a notice informing employees of their family and medical leave rights.)

* Requires employment agencies to serve all applicants equally; to refuse discriminatory job orders; to refrain from prohibited pre-employment inquiries or advertising.

* Prohibits discrimination by unions in membership or employment referrals.

* Prohibits retaliation against any person who has filed a complaint with the Department, participated in a Department investigation or opposed any activity prohibited by the Act.

The law provides for a variety of remedies, which may include:


* Hiring

* Back Pay

* Promotion

* Reinstatement

* Cease and Desist Orders

* Damages for Emotional Distress

* Reasonable Attorneys Fees and Costs

* Expert Witness Fees

* Administrative Fines and Court Ordered Punitive Damages

Persons who believe they have experienced employment discrimination may file a DFEH complaint. Complaints must be filed within one year from the date of the alleged discrimination.

Persons wishing to file a lawsuit directly in court must obtain a "right-to-sue" from the DFEH. For information on this process, call my office telephone number: 415-457-2668 or drop me a line at stevekesten@gmail.com

WHEN IS A BONUS NOT AN INCENTIVE?

Once upon a time back in the early 90’s I owned an old Chrysler La Baron convertible. Each time the kids and I entered the car, a mechanized voice would state in a very emphatic tine, the door is a jar. Of course, one of us would have to ask, “when is a door not a door”? Answer: When it is a jar.

When is a bonus not an incentive? When it discourages productivity. A division president of a larger company regularly corresponds with tidbits from her workplace. Her latest email concerns a bonus plan used by the parent company that actually discourages sales. Seems that in this instance the bonus is based on the salesperson reaching a certain benchmark. However, unlike many thoughtfully structured bonus plans, the salesperson must reach the benchmark to earn the bonus, getting close isn’t good enough to require payment of a pro rate portion.

In this particular company, a salesperson will know by mid summer how likely they are to reach the benchmark required for receipt of the bonus that is paid shortly after the end of the calendar year. If a salesperson’s numbers are on track to reach the benchmark, the salesperson continues to work hard at making sales right up to Dec 31. However, if the salesperson realizes by mid July that the benchmark can be approached but not reached, the incentive becomes a disincentive. The sales person, realizing s/he won’t earn a bonus becomes demoralized and disenchanted. In this company, salespeople only reach the bonus benchmark about fifty percent of the time which means that half of the company’s sales people stop producing at peak level around mid year.

Not only do the sales people stop working at peak performance, their overall productivity actually falls and they develop an adversarial relationship with the company. Instead of seeing themselves as part of a team working toward the goal of greater sales, they feel defeated and isolated. The fall off of moral and productivity is the direct result of diminished effort brought about by the disincentive of a bonus plan that isn’t paid pro rata.

Studies show that employees who receive feedback on both good and bad characteristics of their performance out perform those who receive only negative feedback. A bonus plan that only rewards the employee for 100% success is like a performance review that ignores all the good things the employee does and focuses exclusively on the one or two mistakes the employee might make.

Cyber Monday

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