Calif. Ruling Shows Issues with Overbroad Employment Pacts

by Todd Wulffson

The Wrap News Inc. v. The Information Inc.,[1] a case recently decided by the Los Angeles Superior Court, is a good object lesson for California employers seeking to prevent employees from using confidential information to compete with their business.

According to court documents, a digital news organization, The Wrap News, based in Santa Monica, California, hired Matt Pressberg as a reporter in November 2016. The Wrap had Pressberg sign its standard employment agreement, which had a two-year term and stated that during the term Pressberg "shall not be employed by or otherwise engage in or be interested in any other business," with the only exceptions being employment with The New York Times or The Wall Street Journal. 

It seems the purpose of The Wrap’s agreement was either to prevent employees from leaving at all, or if they desired to leave, to have them at least leave the industry — because the only way to terminate the contract was death, employment with The New York Times or The Wall Street Journal, or up to a two-year sabbatical with no employment.

About a year into his employment, Pressberg became disenchanted with his employment at The Wrap and sought employment with The Information, a rival digital news organization based in the Bay Area. Although Pressberg told The Information where he was working, he did not disclose that he had signed such an onerous employment agreement.

His lawyer had properly told him that it was not enforceable in California pursuant to Business and Professions Code Section 16600, and therefore, not to worry about it. Pressberg resigned from The Wrap on Dec. 1, 2017, received an offer of employment from The Information on Dec. 5, and began working the following month.

About six months later, The Wrap sent correspondence to The Information stating that in essence, it had wrongfully poached Pressberg. The Wrap threatened to sue The Information for interfering with its employment contract if The Information did not pay a hefty sum to The Wrap. The Information declined.

In October 2018, The Wrap sued The Information in Los Angeles Superior Court for unfair business practices under Business and Professions Code Section 17200, intentional contract interference and with prospective business advantage, and misappropriation of trade secrets. Notably, The Wrap did not sue its former employee, Pressberg, who The Wrap contended actually breached his contract.

Unable to convince The Wrap that its lawsuit was predicated on an employment agreement that was contrary to California law, The Information engaged in focused discovery, including the deposition of Sharon Waxman, owner of The Wrap. The Information then filed a motion for summary judgment, seeking dismissal of The Wrap’s lawsuit.

Summary judgment is a valuable tool for eliminating lawsuits before trial, where the matter can be resolved as a matter of law, i.e., by the court. The purpose of a motion for summary judgment "is to provide courts with a mechanism to cut through the parties’ pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute."[2] 

According to the California Court of Appeal's Fourth Appellate District in Aguilar v. Atlantic Richfield Co., California Code of Civil Procedure Section 437c, subdivision (c), requires the trial judge to grant summary judgment if all the evidence submitted and all inferences reasonably deducible from the evidence show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.[3]

Whether a contract is illegal is a question of law to be properly determined by the court.[4] With respect to the employment agreement between Pressberg and The Wrap, the court found The Wrap’s arguments related to the validity of its contract to be unpersuasive.

The court concluded that the plain language of the contract restrained The Wrap’s former employee from engaging in his lawful profession, even after his employment with the company ended. Therefore, the court found that The Wrap’s employment agreement was void as a matter of law pursuant to Business and Professions Code Section 16600.

In addition, the court found that The Wrap had failed to present any facts to show that The Information knew about the contract or did anything to intentionally interfere with The Wrap’s business. Therefore, the contract was invalid, and The Information did not interfere with it in any event.

With respect to the Uniform Trade Secrets Act claim, since the determination as to whether a trade secret exists is normally a question of fact, The Information argued in its motion that Waxman, at her deposition, did not have any facts that Pressberg in any way disclosed any confidential or proprietary information owned by The Wrap to anyone at The Information.

In response to The Information’s arguments, The Wrap provided no opposition in support of its trade secret claim. As such, the court found that The Wrap conceded The Information’s argument, thus eliminating the trade secret issue from the case.

Since an unfair competition claim under California Business and Professions Code Section 17200 is derivative, meaning that there has to be a finding of an underlying bad act, since the other claims failed, The Information argued that The Wrap’s unfair competition claim failed as well. The court agreed and entered judgment in favor of The Information on Jan. 8, 2020.

The takeaways from this case for employers are several: First, although employers such as The Wrap have a legitimate interest in preventing employees from taking the business's information to a competitor, the employer "does not have the right to the exclusive use of an employee, which would be tantamount to indentured servitude."[5] 

Absent specific consideration for the noncompete and reasonable restrictions designed to balance the employer and employee’s interests, noncompete language such as that used by The Wrap is not allowed in any state. In California, an employer can only enforce a noncompete when it is part of the consideration for the purchase and sale of a business (i.e., the business owner sells the business and agrees not to compete for a reasonable period of time).

Second, if the concern is with respect to confidential and proprietary information, have employees execute an appropriate nondisclosure agreement, either as part of the employment agreement or as a stand-alone agreement as a condition of employment. Employers absolutely have the right to protect their truly confidential and propriety information, but they have to identify what that is, treat the information as confidential, and then consistently enforce policies protecting it.

It does not work simply to say that everything an employee knows is somehow confidential and cannot be used to work for a competitor. If that were true, employees could never leave any employer. 

For an actual trade secret, the standards are even stricter. Most states have their own version of the Uniform Trade Secrets Act, which all generally require a plaintiff to demonstrate that: (1) it owned a trade secret; (2) the competitor acquired, disclosed or used the plaintiff’s trade secret through improper means; and (3) the competitor’s actions damaged the plaintiff. 

A "trade secret" is generally defined as information, including a formula, pattern, compilation, program, device, method, technique or process, that: (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

If a plaintiff can meet this high burden, it may recover damages for the actual loss caused by the misappropriation and may also recover for the unjust enrichment caused by the misappropriation that is not taken into account in computing damages for actual loss. In the case of The Wrap, they could not even come close to this standard — and in the end, did not even try.

A third takeaway from the case is that — even in California — an agreement not to solicit one’s former colleagues can be enforceable; however, in order to sue a competitor for interfering with such a promise (the competitor did not sign the contract after all), one has to show the competitor knew about the nonsolicit agreement, and took steps intentionally to interfere with it.

In most cases, it is difficult to prove such intentional interference unless a former employee is willing to testify that he or she was poached. The best way to maximize the value of a nonsolicit is to have the employee agree that if they leave, you have the right to notify any new employer or their nonsolicit promise. If done in a neutral, nondefamatory way, this is an excellent way to put a competitor on notice that they need to be very careful in recruiting and hiring your employees. 

It is also important not to overreach. A nonsolicit promise may be enforceable (particularly if tied to confidential information about employees), but a blanket proscription against hiring your employees is not enforceable against your competitor (they have no contract with you), and not enforceable against your departing employee, as it is their new employer, not them, that will be hiring your employees.

Finally, and perhaps the best lesson from this case is one of Richard Branson’s credos:

"Train people well enough so they can leave, treat them well enough so they don't want to." You can have all the appropriate protections baked into your employment agreements, but if the employees are unhappy, relying on threats of litigation is likely to set your business up for failure — both with any litigation involving the departing employee, and with respect to any future recruiting efforts, when word gets out that you like to sue employees that leave you.

It is far better to treat your employees well, have appropriate protection of your confidential information, and part ways with employees on amicable terms. In the long run, you will save money, have more productive employees and spend less time with lawyers.

Todd R. Wulffson is the Orange County office managing partner at Carothers DiSante & Freudenberger LLP.

Disclosure: Wulffson was lead counsel for The Information in the matter discussed in this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1]        Los Angeles Superior Court Case No. SC129953.

[2]        Aguilar v. Atl. Richfield Co. (2001) 25 Cal. 4th 826, 843.

[3]        Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.

[4]        Kashani v. Tsann Kuen China Enterprise Co. (2004) 118 Cal.App.4th 531, 540.

[5]        Quoting from Page 2 of the court’s Dec. 10, 2019 Ruling on The Information’s Motion for Summary Judgment.

 

As originally appeared on Law360.com - to view, click here.

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