So, I thought I’d point to this post from Robin Weideman on Dowell v. Pacesetter, Inc., a case which is more or less unremarkable, except that it is part of a continuing trend from the Court of Appeals: quit trying to make exceptions to B&P 16600.

We saw this earlier this year in TRG v. Galante and FLIR Systems v. Parrish. I noticed that I was hoping in my FLIR post to see the TRG ruling in July, but it came down in August.

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My only comment is that the courts could eliminate a lot of so-called “trade secrets” litigation and other back-door attempts to create and enforce covenants not to compete in California by continuing with the trend of cases we’ve seen this summer, including TRG and Flir.

The Legislature is free to reconsider Bus. & Prof. Code 16600 at any time. It can also add more teeth to the UTSA if it wishes. But as written, those statutes allow for employee mobility, but with remedies for intellectual property theft. They do not provide for entrepreneur-killing bad faith lawsuits. I’m glad to see the Court of Appeal is going to make people think twice about that.

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Gregory Chudacoff was an attorney who represented Maxsecurity, Inc.  When Mark Neville left his employment with Maxsecurity, Chudacoff wrote a letter to Maxsecurity’s customers accussing Neville of various torts and advised them not to do business with Neville unless they wanted to be involved with the litigation.

Maxsecurity sues Neville, Neville sues Chudacoff.  Chudacoff anti-SLAPPs Neville’s Complaint against him.

Will this become standard practice now?  Forget convenants not to compete! We can just send letters saying we’re going to sue.  The Court upheld this argument.  Here’s how it gets around the idea that this kind of tactic will be used to stifle competition:

Relying upon Herzog v. “A” Company, Inc. (1982) 138 Cal.App.3d 656 (Herzog), Neville asserts that the Letter could not have been sent in good faith because it was, in effect, an attempt to prevent Neville from competing with Maxsecurity in violation of Business and Professions Code section 16600 (section 16600).  Section 16600 declares void “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind . . . .”  The Letter did not constitute a covenant not to compete, nor did it accuse Neville of violating a covenant not to compete.  The Letter accused Neville of improperly soliciting Maxsecurity’s customers.  Section 16600 does not authorize employees to compete with former employers by stealing their confidential customer information.  (See Board of Trustees v. Roche Molecular Systems (N.D. Cal. 2007) 487 F.Supp.2d 1099, 1115 [section 16600 permits enforcement of agreement to the extent necessary to protect trade secrets and prevent unfair competition]; Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429-1430; Robert L. Cloud & Associates, Inc. v. Mikesell (1999) 69 Cal.App.4th 1141, 1150 [“acts of solicitation of the former employer’s customers and the misuse of confidential information are acts of unfair competition that may be enjoined”].)  Neither section 16600 nor Herzog is relevant here.
We also reject Neville’s argument that the Letter is not protected because it was addressed to Maxsecurity’s customers, against whom Maxsecurity had no claim, rather than to Neville.  Although many anti-SLAPP cases involving prelitigation communications concern demand letters or other statements to adverse parties or potential adverse parties (e.g., Flatley, supra, 39 Cal.4th at pp. 307-309; Rohde, supra, 154 Cal.App.4th at pp. 36-37; Blanchard v. DIRECTV, Inc. (2004) 123 Cal.App.4th 903, 918-919), there is no such requirement in the text of section 425.16, subdivision (e)(2).  That provision has been held to protect statements to persons who are not parties or potential parties to litigation, provided such statements are made “in connection with” pending or anticipated litigation.

The problem with this analysis is that section 16660 is not normally construed that narrowly.  Courts have interpreted it as expressing a strong public policy.  While the court may have looked askance at the personal attack on the lawyer, and while we can’t argue that in the context of an anti-SLAPP motion, if something meets the CC section 47 tests, we think this decision, if it becomes good law, will effectively destroy section 16600, increase litigation, and hurt employee mobility.

Does Neville have a remedy against Maxsecurity itself in another context? That doesn’t seem to be addressed.   It seems plain to me that a lawyer, who is sworn to defend his client’s interests, not those of others, warning his client’s customers that they could become entwined in a lawsuit if they do business with Neville is highly suspect.

The question is, whether Neville really did misappropriate information from Maxsecurity.  If it turns out later that he did not, this decision will look poor.

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It is none of the above. At most, it might provide for an interesting “cf” at the end of a string of citations in a law school textbook. It is most certainly not something that should form the basis of any advice to a client.

First of all, this is a very specific fact pattern. The employer was a New Jersey corporation, and the arbitration agreement required arbitration to occur in New Jersey. That fact alone limits the usefulness of this holding to many in-state only employers.

Second, it’s clear that if a normal conflicts analysis was applied, the non-compete agreement could not stand. If the Supreme Court takes this case and affirms the ruling of the Court of Appeal, then we have new law that we can rely on. But I wouldn’t bet on that. This ruling basically gives employers the ability to make an end run around California law. As nice as that may be, this just isn’t the kind of ruling that stands up for long.

If you want to go out on a limb with this ruling, call another firm. If you want to be safe rather than sorry, and not end up in $600/hr. litigation because your lawyer talked you into being a guinea pig for appellate litigation, call us.

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I run a small business and I can’t afford to offer much of a severance package to an employee that I need to get rid of, but I’m not sure what else I can do to get a release.

ANSWER

I get this one all the time. If you believe you have a “high risk” termination, you’re wise to try and get a release. It can’t cover everything, but it will sure help. If you’re running a smaller business, it’s probably going to hit you hard in the wallet to issue a chunk of severance (which allays the first concern of the departing employee: how do I pay my bills and get my next meal). Here are a few ideas you can use that are low cost.

(1) Allow the employee to resign, but agree not to contest unemployment.
(2) If you are covered by it, offer to pay a month of COBRA instead of salary.
(3) Offer a letter of recommendation (beware this one if they cause damage at the next place)
(4) Offer to expunge their file of some bad things.

That should give you enough chips in your exit interview to get a release out of many people.

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Your company’s confidential documents are being copied. Your biggest competitor has learned your trade secrets. Photographs of one of your supervisors disciplining an employee are appearing on a union organizing website. And, to make matters worse, a sexual harassment charge has just been filed against your company.

Boo! Now, good grief! I’m even getting a tick from reading that. Now, I’m not necessarily saying that you shouldn’t have a camera phone policy. But, I think that each of those threats would be covered by a well-drafted policy manual that doesn’t list each and every possibility. You run the risk of listing so many things that the list looks exhaustive. And then when the next gizmo comes along, everyone thinks, hey, it’s not on the list!

What if people don’t know they’re not supposed to do those things without explicit mention of the phone? Same problem. They won’t make that connection with the next gizmo. Focus on the behavior that’s the problem, not every instrumentality of it. Keep sensitive documents secure. Keep meetings confidential if they are sensitive, and make sure you strictly enforce your sexual harassment policies. After all, do you really want an employee to say, “but I didn’t take that picture of her butt with my camera phone! It was my camera!”

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“. . . no cause of action exists for tortioius nonrenewal of an employment contract in violation of public policy.”

Judgment below AFFIRMED.

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Judgment AFFIRMED. (Unanimous)

The SF Chronicle has this report on this case.

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