Company's High-Revenue Salesperson is Suspected of Preparing to Leave. We Want to Prevent Unfair Competition, but How?

Covenants not to compete are generally unenforceable in California, however, lesser restrictions, such as promises not to disclose proprietary “trade secrets” or non-public confidential information generally will be upheld, if the employer has implemented reasonable measures to protect the secrecy of the proprietary trade secrets and confidential information.

In addition, during the time an employee is working for your Company, they are compensated for performing work for your Company, and should not be preparing to compete, or performing work for another Company.  Even before an employee resigns, the employee may notify customers that he is severing his business relationship with you and “announce” his new employer, address and contact information.  However, pre-resignation, the employee is not entitled to solicit the customer because as an agent, the employee owes a duty of loyalty and diligent and faithful service to his current employer.  Post –resignation, announcement is not unlawful, however, if the identities of the clients are protected as trade secrets, then the employee may be held liable for misappropriating trade secrets under California and federal laws.

California does not permit “no-hire” arrangements between employers, and more recently no poaching agreements were also held to be unlawful.  Certain post-termination contractual restraints upon soliciting co-workers are valid and have been held to not amount to unlawful covenants not to compete.

If the competitor uses unfair or deceptive means to hire away your employee, such as disrupting your business, deleting and destroying information, etc., your Company may recover for the competitor’s interference with the employee’s at-will relationship with your Company. 

Unfair competition claims may arise if your employee misrepresents or disparages your products or services; secretly diverts business to the competitor; solicits only the preferred or your most profitable accounts or clients; or interferes with your current contractual relationships or prospective ones that you are pursuing. 

There are a number of recommended actions that should be taken but at the direction of counsel to protect your Company’s most valuable assets, its information, employees and clients. Before doing anything though, it is critically important that no one touches the employee’s electronic communications until they have been properly preserved, collected and reviewed because digital footprints are the most important evidence in these types of matters.

Lisa Sherman
California Labor & Employment Attorney