Employment Law

In December 2003, the California Court of Appeal sent out a warning to California employers by ruling that an employee fired for refusing to sign an unenforceable covenant not to compete can sue for wrongful termination in violation of public policy. This ruling highlights an employer’s obligation to carefully review its confidentiality policies and agreements and underscores the risks taken by an employer that attempts to go too far in curbing competition.

Thompson v Impaxx, Inc. (Dec 8, 2003, B164006)
The facts of the case are straightforward. Plaintiff Daniel Thompson worked for Pac-West Labels. In September 2000, Impaxx, Inc. bought Pac-West and asked Thompson to sign a covenant not to compete which read as follows: “For a period of one (1) year following the termination of employment, I will not call on, solicit, or take away any of Pac-West Label's customers or potential customers with whom I have had any dealings as a result of my employment by Pac-West Label.” Thompson was fired for refusing to sign the covenant not to compete. Subsequently, Thompson sued for wrongful termination in violation of public policy based on the theory that the covenant not to compete was void under California law and, as a result, his termination for refusing to sign the unenforceable covenant could constitute an actionable violation of public policy. As detailed below, the Court of Appeal agreed with Thompson’s theory and allowed him to pursue his wrongful termination action against his former employer.

When is Customer Information Proprietary?
California Business and Professions Code Section 16600 states that, with few exceptions, every contract that restrains anyone from engaging in a lawful profession, trade, or business is void. Thus, as the Court of Appeal explained, anti-solicitation agreements like the one Thompson refused to sign are deemed void as unlawful business restraints except where their enforcement is necessary to protect legitimate proprietary and trade secret information, such as a confidential customer list. Importantly, a customer list will constitute a protectable trade secret only where the employer has actually expended time and effort in identifying customers with particular needs or characteristics and has taken measures to ensure the confidentiality of this customer information.

On the other hand, customer information will not constitute a protectable trade secret where the information is readily ascertainable through public sources, such as business directories. In the absence of a protectable trade secret, the right to compete fairly outweighs an employer's right to protect itself against competition from former employees who desire to capture a share of the market.

In Thompson's case, the employer presented no facts establishing that its customer information was proprietary, confidential, or a trade secret. To the contrary, Thompson alleged that his former employer made no efforts to keep the names of its customers and potential customers secret, that scores of customer names were readily available on the former employer’s website, and that customer names could be deduced from the employer's easily accessible sample work product. Based on these allegations and in the absence of any facts to the contrary, the covenant not to compete that Thompson refused to sign violated California law and could not be enforced against Thompson. As a result, the Court of Appeal held that Thompson properly stated a valid cause of action for wrongful termination in violation of public policy against his former employer.

Conclusion
Word to the wise employer: Do not attempt to go too far with your covenants not to compete. Although in most cases an overly broad covenant not to compete results only in the agreement being unenforceable, the Thompson case shows that the consequences can be much greater. Accordingly, before terminating an employee for refusing to sign a covenant not to compete, an employer should carefully consider the risks involved. To do this, employers must review their confidentiality agreements and policies to ensure that any customer non-solicitation provision is not merely an attempt to curb competition, but a justifiable effort to prevent the misuse of confidential information. In addition, employers should review their internal practices and procedures for maintaining confidentiality of customer-related information to ensure they are taking all reasonable steps to protect the confidentiality of their trade secrets.

Wrongful Employment Termination Practice
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