The California Appellate Court decision in VL Systems, Inc. v. Unisen applied Business and Professions Code 16600 to invalidate a non-solicitation clause. B&P section 16600 states: “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.” Courts often use this statute to invalidate non-compete agreements, but it has rarely been applied to non-solicitation agreements.
Non-compete agreements prevent employees from working for competitors and are generally unenforceable in California. Non-solicitation agreements prevent customers and/or competitors from hiring personnel. “California courts have consistently declared this provision an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice. Section 16600 has specifically been held to invalidate employment contracts which prohibit an employee from working for a competitor when the employment has terminated, unless necessary to protect the employer’s trade secrets. The corollary to this proposition is that [a competitor] may solicit another’s employees if they do not use unlawful means or engage in acts of unfair competition.” (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859.)
VL Systems, Inc. (VLS) and Unisen entered into a short-term computer consulting contract. The contract provided that Unisen would not hire any VLS employee for 12 months after the contract’s termination, subject to a liquidated damages provision. Within that period, Unisen hired a VLS employee who had not performed any work for Unisen, and indeed, had not been employed by VLS at the time the Unisen contract was performed. VLS sued for breach of contract, and the court awarded it part of the amount it sought under liquidated damages provision. Unisen appealed, arguing the no-hire provision was unenforceable and that the liquidated damages award was improper. The Appellate Court agreed that as written, the no-hire provision was unenforceable as a matter of law and reversed the judgment.
The court warned “against any inference that all such clauses are unenforceable. Perhaps a more narrowly drawn clause limited to soliciting employees who had actually performed work for the client might pass muster.”
In invalidating the non-solicitation clause in this case, the court pointed out that, “[f]reedom of contract is an important principle, and courts should not blithely apply public policy reasons to void contract provisions. (Dunkin v. Boskey (2000) 82 Cal.App.4th 171, 183-184.) This type of contractual provision, however, may seriously impact the rights of a broad range of third parties. In this case, those third parties not only included the VLS employees who actually performed work for [Unisen] under the contract, but all of those who did not, including [the particular employee involved], who was not even employed by VLS at the time.”
Yous should have your non-competition and non-solicitation clauses reviewed by competent counsel to ensure their enforceability.
Original article by Robert E. Nuddleman of Phillip J. Griego & Associates
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