Mcle Article: What Is Fair Game? Competing in the Employer/employee Relationship

• Publication year: 2021
• Author: By Laura Kelleher

MCLE Article: What Is Fair Game? Competing in the Employer/Employee Relationship

By Laura Kelleher

Laura Kelleher is an associate attorney at Swan Employment Law. She advocates for employees who have been harmed by discrimination, harassment, retaliation, and wage-theft. At the University of San Francisco School of Law, Kelleher received the CALI award for Academic Excellence in an Employment Law course. Before law school, Kelleher served for 27 months as a Peace Corps volunteer in rural El Salvador. She is also a graduate of UC Davis, where she was a rower on the university's award winning crew team.

I. INTRODUCTION

Although less common than cases involving wrongful termination, discrimination, and harassment, there is a subset of cases in employment law regarding unfair competition committed by either the employer or the employee. At odds in many of these cases is the right an employee has to lawfully make a living for herself¹, and the right an employer has to protect its property² Below is an overview on how these principles constrain conduct by both the employer and the employee.

II. CALIFORNIA'S PUBLIC POLICY TO PROMOTE FREE MARKET COMPETITION

California Business & Professions Code section 16600 reads, in large part: "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The straightforward language evinces California's strong public policies favoring both the right to work and free market competition.

Section 16600 invalidates most post-employment noncompete clauses in employment contracts (including employee handbooks and manuals), whether the employment is at-will or a term employment. Thus, an employer cannot restrict a former employee from working for its competitor, no matter how long the former employee worked for the employer or how much the former employee advanced with the employer. Some believe that the success of Silicon Valley is in part attributable to section 16600—because it unfetters competition between companies and encourages employers to make work more desirable since their employees can leave to work for a competitor at any minute. This may explain why the Google campus in Mountain View offers free gourmet meals, free workout classes at its gym, and free shuttles to and from work every day (although potential and current employees may be discouraged by Google's treatment of its employees who take collective action to improve working conditions).

Section 16600 is so broad that it voids even narrowly tailored covenants not to compete in employment contracts. For example, in Edwards v. Arthur Andersen LLP,³ the California Supreme Court rejected Ninth Circuit cases that permitted limited exceptions (International Business Machines Corp. v. Bajorek;⁴ and General Comm'l Packaging, Inc. v. TPS Package Engineering, Inc.,⁵ and invalidated a restrictive covenant that prevented the employee from soliciting certain clients of the employer for a limited period of time (eighteen months) after the employment terminated.

Although post-employment noncompete clauses are illegal in California, they are not illegal in all states, which can create an interesting dilemma if the former employee leaves a company whose state laws permit noncompete clauses and then works for a California competitor. The former employer may still sue for breach of contract in their home state, and the employee and the new employer may still sue to invalidate the clause in California. Whoever is first to judgment, as opposed to who first filed, is likely to have their disposition upheld, because the first final judgment on the merits will be given full faith and credit, even if the judgment violates California public policy.⁶

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Importantly, even though section 16600 invalidates clauses that restrict competition after employment has ended—it is perfectly valid for an employer to restrict competition during employment. This follows the principle and the statute that virtually everything an employee acquires by virtue of her employment (save for compensation) belongs to the employer.⁷ Thus, using knowledge and skills acquired through one's employment to secretly work for a competitor, or to work for oneself in direct competition with one's employer, is violative of Labor Code section 2860, and is not protected by 16600. Furthermore, competing with one's own employer during employment can open the employee to an unfair competition lawsuit, in which the employer can disgorge the employee of any profits made through the competition and return those profits to the employer.⁸

In its application, California Business & Professions Code section 16600 may be used as a defense against a former employer who seeks to enjoin an employee from subsequently competing with it. But it might also be relied upon in...