Conflicts in California’s trade secret laws on customer lists create uncertainty

When salespeople in California’s dynamic tech economy transition between jobs, the value they bring to their new company is often their customer relationships. Startup founders and salespeople considering joining competitors often assume continuing to maintain these customer relationships is noncontroversial given California’s well-known policy favoring employment mobility and outlawing non-competition agreements.

Yet California trade secret law regarding the ability of salespeople to solicit these customers once they jump to a competitor is increasingly confused and fails to provide meaningful guidance on what type of conduct is permissible. Thus, a salesperson’s move from their current company to a competitor is risky given it is unclear whether and to what extent they can continue servicing clients or contacts they previously worked with.

A salesperson working for a value-added reseller (VAR), for instance, should understand what they are getting into before moving to a competitor — they may risk longstanding relationships with original equipment manufacturers (OEMs) and end users. This article explains the conflicting law on this issue so that salespeople planning on jumping ship, and the companies considering hiring them, can be informed regarding the current legal landscape.

California law invalidates non-competition agreements

In the vast majority of states, employers can, and do, require employees to enter into some form of non-competition agreement in exchange for continued employment.¹ In contrast, California has a long-standing policy of favoring employment mobility over an employer’s concerns. California’s policy is embodied in Business and Professions Code section 16600, which provides: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

California courts “have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility” that is intended to “ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.”² The policy also allows California employers to “compete effectively for the most talented, skilled employees in their industries, wherever they may reside.”³ Accordingly, unlike in most states, the “interests of the employee in [their] own mobility and betterment” generally outweigh the “competitive business interests of the employers.”⁴

Courts have broadly applied section 16600, invalidating non-competition agreements, which would prohibit or restrict an employee from leaving to work for a competitor.⁵ Importantly, courts have also invalidated contractual provisions purporting to restrict an employee’s ability to leave and then solicit the company’s customers.⁶ In other words, a salesperson cannot be contractually precluded from leaving their company, joining a competitor and continuing to solicit, service and communicate with their former company’s clients. Furthermore, with limited exceptions, California courts will disregard a “choice of law” provision purporting to mandate that the court follow the law from a state that enforces noncompetes.⁷

Thus, when it comes to avoiding contractual restraints on their ability to compete, salespeople have significant protection under California law. Scholars have noted that courts’ broad application of section 16600 has, in part, facilitated Silicon Valley’s dynamic, highly competitive economy.⁸

The tension between protecting trade secrets and the policy embodied by section 16600

As California courts have recognized, there is a “tension” between the policy of unfettered employment mobility on the one hand, and the enforcement of trade secret laws, on the other hand.⁹ This is because, under California law, trade secret law represents a central limitation on section 16600’s broad prohibition on restraining an individual’s right to compete with their former employer. It is long-recognized and uncontroversial that section 16600 does not permit an individual to misappropriate a former employer’s trade secrets.¹⁰ Competition using a former employer’s trade secrets is unlawful, and the accused individual can be enjoined and be liable for damages for engaging in this conduct.

In the context of customer contacts, as the court explained in The Retirement Group v. Galante, this means that a salesperson’s continued solicitation of customers is unlawful only if it is done in connection with the misappropriation of trade secrets.¹¹ Left having to rely solely on trade secret claims, companies in California are aggressive and creative at labeling any and all information a trade secret in hopes of restraining a departing employee from competing. And, as explained below, California’s confused trade secret law leaves ample opportunity for an aggrieved company-plaintiff to do so.

Uncertainty with trade secret law in California regarding customer contacts

There is little meaningful guidance regarding whether the specific information in any given case will qualify as a trade secret under California law in the employment mobility context. Take a common example: An employee works for a value-added reseller and has relationships with OEMs, end-user clients and other vendors. They then start working for a competitor, where they reach out to continue connecting OEMs and end-user customers they worked with at their former employer. Recall that, under section 16600, they cannot be contractually barred from soliciting their former employer’s customers.¹² At the same time, a former employee may be barred from soliciting customers of their former company if they are utilizing trade secret information to solicit those customers.¹³ Thus, companies seeking to enjoin a departing employee from competing in California often claim the ex-employee is using a trade secret in connection with engaging with the company’s customers.

What qualifies as trade secret information in this context is highly uncertain. For example, a former employee’s “general knowledge, skill, and experience acquired in [their] former employment” does not constitute a trade secret.¹⁴ Citing this principle, some federal courts in California have concluded that an employee’s “relationship” with a customer is not a trade secret.¹⁵ At the same time, other California-based federal courts have concluded that “trade secret protection can extend to the business contacts an employee makes while working for [their] employer.”¹⁶ It is very difficult to see how these two principles can be reconciled.

Similarly, customer information such as customer “needs” and “preferences,” among other broad categories of information, can constitute trade secrets.¹⁷ Thus, when an employee joins a new company, can they offer their former customers a better deal based on what they know from their work at the former company? Can they even contact the customers at all if they are “business contacts” they learned about through their work at the former employer? They should be forgiven for not knowing the answer.

A separate but related problem is whether a written customer list qualifies as a trade secret. The guidance here, again, is of limited assistance. The seminal case on this topic explains that “the more difficult information is to obtain, and the more time and resources expended by an employer in gathering it, the more likely a court will find” a customer list constitutes a trade secret.¹⁸ The “most important consideration” is whether the information is “readily accessible to a reasonably diligent competitor.”¹⁹ However, at the same time, “a customer list may be a trade secret even if the general class of customers is readily accessible to others.”²⁰

In other words, even if a customer list contains information that is publicly available to other competitors and those with knowledge in the field, such information could still be a trade secret depending on how much time and resources the company claims to have spent compiling it. Most companies, moreover, can make a colorable argument that it spent resources compiling a customer list of needs and preferences, etc., because its business is targeted at maintaining those clients, so it has usually heavily invested in developing information specific to those clients. So, it is very challenging for a salesperson to feel comfortable that a written customer list, regardless of the generic nature, is acceptable to take to the next job — even if such a list was created by the salesperson.

What if the customer-specific information is not written down, but merely committed to memory? Still an issue.²¹ On the one hand, California has rejected the inevitable disclosure doctrine, which permits a plaintiff to prove a claim of misappropriation by demonstrating that an ex-employee’s new job will inevitably lead them to rely upon their former company’s trade secrets.²²

The theory underlying the inevitable disclosure doctrine is that “unless the employee has an uncanny ability to compartmentalize information the employee will necessarily rely — consciously or subconsciously — upon knowledge of the former employer’s trade secrets in performing [their] new job duties.”²³ In rejecting this doctrine, California courts noted that adopting the doctrine would run counter to California’s public policy favoring employment mobility because it would effectively block employees from working on similar projects for competitors and unreasonably expect them to “erase their memories.”²⁴

On the other hand, courts have concluded that trade secret information “need not be in writing but may be in the employee’s memory,”²⁵ which comes close to allowing plaintiffs to establish misappropriation through an inevitable disclosure theory.²⁶ Courts try to distinguish between this principle and the inevitable disclosure doctrine by requiring proof that that the former employee is actually using the alleged trade secrets.

Yet in practice this becomes very blurry because plaintiffs can prove trade secret misappropriation by circumstantial evidence.²⁷ Thus, the former employer can point to the following circumstances in an attempt to prove trade secret misappropriation: An employee had access to proprietary information about customers (such as their “needs” or “preferences”), left and joined a competitor, and then solicited those customers — the circumstances, the argument goes, demonstrate the salesperson is relying upon information they learned at their prior company. This law provides an opportunity for a company to obtain an emergency injunction and then push the departing employee into full-scale litigation without any direct evidence that the former employer left the company with anything beyond the knowledge in their head.

Uncertainty can bring consequences

Many salespeople (and other employees) looking at this highly uncertain legal landscape may decide it is simply not worth it for them to risk their livelihood and reputations. Indeed, salespeople who are sued after departing to a competitor have been enjoined from working with customers they serviced at their prior company.²⁸ In many cases, a salespersons’ ability to continue servicing those clients is a central reason they were hired by the new company in the first place and are therefore critical to continued professional success. Thus, risking losing the relationships with those clients/contacts may simply not be worthwhile.

Not to mention the prospect of having to spend hundreds of thousands of dollars in legal fees. Furthermore, even without litigation a former employer can significantly hamper a departing salesperson’s career. Cease and desist letters citing the cases that favor company-plaintiffs often strike fear into the recently departed employee — and their new employer.²⁹ The new employer may decide it is better off terminating the newly hired salesperson than risking drawn-out litigation that often hooks in the new company alongside the salesperson.

Because of this complicated legal landscape, and the serious consequences of a departure going sideways, salespeople wanting to transition to a new company — and companies considering hiring them — should carefully plan the departure and onboarding process and seek counsel regarding how best to avoid a disruptive legal dispute with a former employer. The California Legislature, moreover, should consider clarifying what type of customer contact/solicitation is permissible so that the current legal morass does not further undermine California’s policy favoring employment mobility, which has been a pillar of Silicon Valley’s success.

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