California's "Trade Secret" Exception Depends on Contract Language (Richmond Techs, Inc. v. Aumtech Business Solutions)

California courts have long been hostile to restraints on trade. This strong public policy is embodied in Section 16600 of the Business and Professions Code. Most attorneys agree that general non-competition covenants (outside a sale of business or partnership agreement) are generally unenforceable.

In Edwards v. Arthur Andersen, LLP, the California Supreme Court rejected a "narrow restraint" rule which would have exempted restrictions that did not totally foreclose an employee from working in his chosen profession. Put another way (and more simply), customer non-solicitation covenants aren't enforceable.

The more difficult, lingering issue California courts have not squarely addressed has to do with another narrow class of covenants: the "trade secrets" exception. California hasn't exactly been clear whether a covenant designed to protect trade secrets can be enforced. A recent federal district court case seems to suggest there is some continuing vitality to this doctrine.

But here is the key. Unlike other states where access to trade secrets can be the protectable interest supporting the covenant, California puts a premium on how the covenant is drafted. To walk the fine line between protecting trade secrets and honoring the letter of Section 16600, the courts which have invoked the trade secrets exception require that the covenant, as drafted, only prohibit competition that requires the use of trade secret material.

The Richmond Technologies case is illustrative of this somewhat esoteric principle. The dispute in that case centered on a vendor's alleged misuse of source code to supply competing enterprise resource planning software. The non-compete was broken down into three parts: a general non-solicitation of the plaintiff's employees, a similar non-solicitation of the plaintiff's customers, and a more general non-competition clause barring competition with the plaintiff "using its technology."

Paradoxically, the court held that the two non-solicitation clauses - which usually are more limited - were likely invalid under Section 16600. But because the non-competition clause prohibited the vendor from offering a similar ERP software product using the technology it agreed to provide to the plaintiff, the clause was actually quite narrowly drafted to protect trade secrets. Had the clause barred the vendor from providing a similar product or service generally to the marketplace (without reference to the specific technology it developed for the plaintiff), then the court likely would have found that the "trade secrets" exception could not apply.

Again, in California, when considering this exception, it is imperative to focus on the contract language used. California (in many ways) is not like other states. The fact that the interest to be protected by a non-compete is trade secrets is not relevant. The covenant itself must only prohibit competitive activity requiring the use of trade secrets.

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Court: United States District Court for the Northern District of California
Opinion Date: 7/1/11
Cite: Richmond Technologies, Inc. v. Aumtech Business Solutions, 2011 U.S. Dist. LEXIS 71269 (N.D. Cal. July 1, 2011)
Favors: N/A
Law: California