California’s statutory ban on post-employment covenants, which are enforceable in most other states, has bedeviled employers trying to protect confidential information and trade secrets. The state’s Business and Professions Code section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Due to this prohibition, employers in California have few options in terms of preventing post-employment competition and solicitation.
The one avenue available to California employers is the ability to prevent former employees from using confidential information to compete and solicit customers and employees. Thus, having an enforceable non-disclosure agreement (NDA) preventing the use of confidential information is essential. A recent decision from the California Court of Appeal, Fourth Appellate District, however, has taken the unprecedented step of applying section 16600 to void the scope of non-disclosure provisions on confidential information and set aside an arbitration award that found a former employee has breached the confidential information provisions of his NDA. While this decision should be limited to its unique facts, particularly the fact that it applied to the highly specialized field of statistical arbitrage, employers should review their NDA agreements to ensure the definition of “confidential information” is not so broad that it become a restraint on practicing a chosen profession, trade or business in violation of section 16600.
Background
In Richard Hale Brown v. TGS Management Company, LLC, No. G058323 (Cal. Ct. App. October 13, 2020), the court reversed an arbitrator’s decision finding that a former employee had violated his NDA when he attached and filed confidential information regarding his employer, including its profits and bonus calculations, with his petition to compel arbitration. The appellant worked for TGS Management Company, LLC (TGS), a company that engages in a highly computerized form of equities trading known as statistical arbitrage. As a condition of his employment, the appellant signed an NDA, which included confidentiality provisions.1 “Confidential Information” was defined as “information, in whatever form, used or usable in, or originated, developed or acquired for use in, or about or relating to, the Business” and “Business” was defined as “without limitation analyzing, executing, trading and/or hedging in securities and financial instruments and derivatives thereon, securities-related research, and trade processing and related administration . . . .”
After his job termination from TGS, the appellant filed a claim for declaratory relief, seeking a declaration that he “could compete with TGS without risking a damages claim for breaching the Employment Agreement or jeopardizing his two deferred bonuses.” He also sought an injunction against enforcement of the covenant not to compete in the agreement. TGS responded by stating it would not seek to enforce the non-compete, but counterclaimed for breach of contract, claiming that the appellant forfeited two deferred...
