THE BAR ASSOCIATION OF SAN FRANCISCOCONTINUING LEGAL EDUCATION

ThursdaySeptember 5, 2019MCLE Registration: 11:30 a.m. - 12:00 p.m.

Lunch/Program: 12:00 - 1:15 p.m.

The Labor and Employment Law Section, co-sponsored with the Intellec-tual Property Section present

The State of the State on Employer Data Protection:

Trade Secrets, Restrictive Covenants, Cyber Security and

Data Privacy – What You Need to Know!

As technology evolves, employers are faced with an ever-evolving landscape of data it must protect. Understanding the current state of the law in the areas of trade secrets, restrictive covenants (considered all but dead in California), cyber security, and the basics of California’s new consumer privacy act are necessary to be able to respond quickly and effectively to this changing landscape.

Topics

• Trade secret misappropriation• Non-Solicitation clauses • Cybersecurity• Consumer data privacy act

Section Chair: Ted Borromeo, McKesson Corporation

Register online: www.sfbar.org/calendar or complete form below.

MCLE: 1 Hour To receive MCLE credit, you must sign in during the designated MCLE registration period. This activity is approved for Minimum Continuing Legal Education credit by the State Bar of California. BASF is a certified provider. Provider #103

LocationBASF Conference Center 301 Battery Street, 3rd Floor San Francisco

Cost$40 BASF Section Members$55 BASF Members, Government & Nonprofit Attorneys$65 OthersFREE for BASF Student MembersAll prices increase $10 on the day of the program.

Lunch will be provided.

Event Code: G190302

BASF Members: Be sure to log in to get your discounts!

Refunds will be given up to 48 hours in advance, less a $10 handling fee.

Special Requests: People with disabilities should contact BASF regarding reasonable accommodations.

CLE Webcast: www.sfbar.org/online-cle

Recorded pending

Live

Speakers

Eric Akira Tate Morrison & Foerster LLP

Tyler Paetkau Procopio, Cory, Hargreaves & Savitch LLP

Stephanie Skaff Farella Braun + Martel LLP

Moderators

Danielle OchsOgletree, Deakins, Nash, Smoak & Stewart, P. C.

Sebastian Kaplan Gerard Fox Law, P.C.

The State of the State on Employer Data Protection

Speakers

Eric Akira Tate Morrison & Foerster LLP

Tyler Paetkau Procopio, Cory, Hargreaves & Savitch LLP

Stephanie Skaff Farella Braun + Martel LLP

Moderators

Danielle Ochs Ogletree, Deakins, Nash, Smoak & Stewart, P. C.

Sebastian Kaplan Gerard Fox Law, P.C.

Thursday, September 5, 2019

Location: BASF Conf. Center •301 Battery st., 3rd floor • San Francisco, CA

Event Code: G190302

The State of the State on Employer Data Protection

Speakers and Moderators Bios

Eric Akira Tate

Eric Tate co-chairs the firm’s Global Employment and Labor Group. He has represented technology and other companies in the biggest and most highlypublicized trade secrets and employee mobility cases across multiple industries. Eric also represents companies in whistleblower, wage and hour, and other employment litigation. In addition, Eric counsels companies on employment law compliance and transactional matters, including enforceability of restrictive covenants throughout the United States, #MeToo and other sensitive internal investigations of alleged employee misconduct, employment aspects of mergers and acquisitions,

and collective bargaining and traditional labor relations.

Eric recently represented Uber in its diligence investigation as part of its acquisition of Ottomotto, the autonomous vehicle start-up founded by former Google engineers. He then helped lead Uber’s defense of the subsequent patent infringement and trade secrets misappropriation suit filed in 2017 by Waymo, which settled five days into trial in February 2018. In addition to technology companies, Eric has handled similar matters for companies across many industries, including but not limited to, Williams Sonoma v. Restoration Hardware, International Lease Finance Co. v. Air Lease Corporation, Melaleuca, Inc. v. Shaklee Corporation, and New Century Mortgage v. Encore Credit. A representative sampling of Eric’s other key matters is further below.

Eric is a leader in the American Bar Association (ABA) Labor and Employment Section and Employment Rights and Responsibilities Committee, serving as co-chair of the Covenants Not to Compete and Trade Secrets Subcommittee and recently elected to the governing Council for the Labor and Employment Section. Eric has also served as a past co-chair of the ABA’s Annual Meeting Committee, the ABA Labor and Employment Law Section Annual CLE Conference, the ABA’s Annual Meeting Committee, and the Alternative Dispute Resolution, Employment At-Will and Collateral Torts, and Worker Dislocation Subcommittees. He also served on the Planning Committee for the National Employment Law Council’s Annual Conference. Eric has been recognized by San Jose magazine as one of Silicon Valley’s Top 300 lawyers, as a Super Lawyer by Northern California Super Lawyers magazine, and as one of the Daily Journal’s “Top 20 Under 40.” He has also been listed in Legal 500 US and Best Lawyers in America.

Tyler Paetkau

Tyler M. Paetkau has represented employers in labor and employment law matters for more than 25 years. He has handled numerous litigation cases and has extensive employment counseling experience. Tyler’s areas of practice include defending employers against claims of wrongful termination, discrimination, retaliation, sexual harassment, defamation, wage and hour violations, unpaid commissions, collective and class actions, and unfair labor practice charges. Tyler also represents employers in litigation involving unfair competition, misappropriation of trade secrets, restrictive covenants, and employee mobility issues. He also has extensive

experience representing employers in union-management labor relations matters, including union organizing campaigns, strikes, and collective bargaining negotiations.

Stephanie Skaff

Stephanie Skaff represents companies in complex litigation involving intellectual property, technology, privacy, and licensing issues. Her clients benefit from her knowledge of and credibility with the state and federal court benches gained through her roles as a past president of the Bar Association of San Francisco and as a former co-chair of the Northern District of California Lawyer Representatives Committee.

Stephanie is regularly chosen as lead counsel for trade secret, patent infringement, and other intellectual property actions venued in jurisdictions

around the country, including the Northern District of California, the Eastern District of Texas, and Delaware. She represents clients in actions involving computer hardware, software, internet search and applications, mobile devices, gaming, financial services, encryption, networking, and database technology. Her clients have included well-known companies like Google and Dell, and also smaller technology companies and individuals battling significant “bet the company” litigation disputes.

Stephanie has successfully represented clients in high profile intellectual property disputes for more than two decades. Most recently, she helped lead the team responsible for a multimillion jury verdict in a trade secret and breach of contract case involving data center technology. Stephanie brings a unique ability to help her clients overcome legal challenges, tell their stories to lay judges and juries, and forge a strategic path to the quickest and most successful resolution of their intellectual property disputes.

Stephanie is a founding member of the Resource Board of the National Association of Women Judges, a former barrister and associate in the Edward J. McFetridge Inn of Court, and a past co-chair of the ABA Litigation Section’s Intellectual Property Committee. She has a background in database design and programming and, prior to law school, worked for a large public accounting firm in Los Angeles, California.

Danielle Ochs

Ms. Ochs works in the San Francisco ogce of Ogletree Deakins, where she is a Shareholder. She serves on the firm’s Pricing CommiBee and has chaired the firm’s African American Business Resource Group, served on the Executive CommiBee of the firm’s Women’s Initiative, and served as a member of the firm’s DiversiC Steering CommiBee. She has nearly 25 years of experience as a civil litigator, with an emphasis on the representation of both private and public employers in employment, trade secrets, and unfair competition maBers in federal and state trial and appellate courts and administrative agencies. Ms. Ochs’ experience includes successfully

defending employers in both jury and bench trials and in arbitration proceedings. She currently dedicates a significant portion of her practice to trial court litigation, arbitration, and strategic conflict management. She works closely with her clients to develop effective strategies for litigating and resolving legal actions, approaching each case zealously and strategically with a steadfast commitment to client service. Ms. Ochs also has active advice and counsel, training, and investigations practices, working closely with employers on a varieC of employment, trade secret, and unfair competition compliance issues with the goal of avoiding litigation. She has represented employers in a broad array of local, national, and international industries, including accounting, banking, defense, energy, higher education, hotel, manufacturing, retail, semiconductor, sports, transportation, technology, and utiliC. She has represented several “tech” employers, as well as employers in a broad array of other local, national, and international industries. Ms. Ochs regularly speaks across the country on a range of employment, trade secret and unfair competition issues.

Ms. Ochs received her bachelor’s degree in Sociology from the UniversiC of California, Santa Cruz, where she was a Regents Scholar. She received her law degree from the UniversiC of California, Hastings College of the Law. From 2005 through 2014, Ms. Ochs taught at Hastings as an Adjunct Professor of Law in the areas of Pretrial Practice and Employment Discrimination. She is actively involved in the legal communiC and is currently an Executive CommiBee member of the Labor and Employment Law Section of the Bar Association of San Francisco, a past Chairperson of the Labor and Employment Law Section of the National Bar Association (“NBA”), a past President of Black Women Lawyers of Northern California, and is a past Director of NBA Region IX. In 2018, Ms. Ochs was named a “Most Influential Black Lawyer” by Savoy Magazine (2014).

Sebastian Kaplan

Sebastian Kaplan litigates disputes concerning trade secrets, trademarks, copyrights, and complex commercial transactions. He represents clients in both federal and state courts and has successfully resolved claims at all stages from pre-litigation settlement negotiations through trial. In addition to intellectual property litigation, he represents technology innovators in complex disputes involving breach of contract and corporate control. Sebastian’s work has earned him recognition by SuperLawyers as a Rising Star for Intellectual Property Litigation and Business Litigation in 2015–2019.

Sebastian is an active member of local and national bar associations. In 2016, he was appointed by the President of the American Bar Association to sit on the Advisory Commission of the Standing Committee on Public Education. He is a Board Member of the Bar Association of San Francisco (“BASF”) and Chair of the BASF Intellectual Property Section. In 2013, he served as the President of BASF’s Barristers Club, comprised of BASF attorneys with less than ten years of practice, and was named Outstanding Barrister of the Year in 2016.

Sebastian frequently writes and speaks on issues of trade secrets litigation, including the recently enacted Defend Trade Secrets Act, and the Computer Fraud and Abuse Act, as well as trademark litigation and copyright issues. Sebastian launched the IP BYTES series of presentations under sponsorship of the BASF Intellectual Property Section, which showcases brief talks by corporate counsel, outside attorneys, and experts on developments in the areas of trademark, trade secrets, copyright, and patent law.

He is also committed to pro bono homelessness prevention and regularly represents indigent tenants facing eviction. In 2015, Sebastian was awarded BASF’s annual Housing Justice Award for first-chairing a four-day unlawful detainer trial.

Before joining Gerard Fox Law, Sebastian litigated at the San Francisco offices of Fenwick & West LLP and Heller Ehrman LLP, and clerked for the Honorable Carlos T. Bea at the U.S. Court of Appeals for the Ninth Circuit. While attending Stanford Law School, Sebastian was the Submissions Editor for the Stanford Journal of International Law. After a sojourn to the East Coast, where he graduated from Wesleyan University’s interdisciplinary College of Social Studies, Sebastian returned home to the East Bay where he now lives with his wife and three daughters.

1

The State of the State on Employer Data Protection: Trade Secrets, Restrictive Covenants, Cyber Security and Data Privacy – What You Need to Know! Thursday, September 5, 2019

12:00 -1:15 p.m.

Tyler M. Paetkau, Esq. Procopio, Cory, Hargreaves

& Savitch LLP

Stephanie P. Skaff Farella Braun & Martel

Sebastain Kaplan Gerard Fox Law

Danielle Ochs Ogletree Deakins, P.C.

Panelists Moderators

Eric Akira Tate Morrison & Foerster LLP

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Key developments in employee-related restrictive covenants Protecting trade secrets during employee mobility An update on privacy and data security laws Q & A

Agenda

KEY DEVELOPMENTS IN EMPLOYEE-RELATED RESTRICTIVE COVENANTS IN CALIFORNIA

Eric Akira Tate, Co-Chair, Global Employment and Labor September 5, 2019

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• B&P 16600 – No non-competes except for owner in sale of business (16601); partnership (16602); or LLC (16602.5)

• Employee non-solicits enforceable - Loral Corp. v. Moyes (1985) • Small or limited part exception - IBM v. Bajorek (9th Cir. 1999) • No hires unenforceable - VL Systems v. Unisen, Inc. (2007) • Small or limited part exception violates CA public policy - Edwards v.

Arthur Andersen, LLP (2008) • Customer non-solicits analyzed like non-competes; no trade secrets exception

and are not enforceable

• Court does not address employee non-solicits

Background

©2019 Morrison & Foerster LLP

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• Are employee non-solicits still enforceable under California law? • What does California Labor Code Section 925 mean for restrictive

covenant enforceability under California law?

What remains?

©2019 Morrison & Foerster LLP

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• AMN Healthcare v. Aya Healthcare, 28 Cal. App. 5th 923 (11/1/18) • Temporary nurse staffing industry • Ds had 1 year non-solicits barring them from directly or indirectly

soliciting or recruiting, or causing others to solicit or induce, any employee of AMN

• Ds former sales employees of AMN went to work for Aya • Temporary nurses who were assigned to AMN clients were deemed

employees of AMN • Court applies customer non-solicitation authorities to analyze

employee non-solicit • What would happen if the AMN Ds were C-level executives, not sales employees,

and who did not do actual recruiting of temporary nurses?

Employee non-solicits – AMN Healthcare

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• Barker v. Insight Global, 2019 U.S. Dist. LEXIS 26286 (1/11/19) • Class action claim asserting the employee non-solicits violated CA’s

Unfair Competition Law • Court initially dismissed class action claim citing Loral • Plaintiff sought reconsideration after AMN • Court followed AMN and reversed, permitting Plaintiff to file amended

complaint alleging class action claim based on employee non-solicit

Employee non-solicits - Barker

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• WeRide Corp. v. Kun Huang, 2019 WL 1439394 (4/1/19) • Autonomous vehicle company WeRide filed suit alleging various

claims, including breach of its employment agreement. • WeRide’s employment agreement contained a non-solicitation

provision, prohibiting the employee’s from soliciting WeRide employees for one year after employment.

• Court invalidated the employee non-solicit provision, citing AMN and Barker and finding that it constituted an unlawful restraint on employment.

Employee non-solicits - WeRide

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• To what extent is AMN distinguishable on its facts? • To what extent are Barker and WeRide binding? • To what extent is employee non-solicit enforceability an open

question until California state court rules in a case with less arguably distinguishable facts?

• What should employers do now?

Employee non-solicits – Now what?

©2019 Morrison & Foerster LLP

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• (a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

• (1) Require the employee to adjudicate outside of California a claim arising in California.

• (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

• (b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.

LC 925 - Text

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• (c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.

• (d) For purposes of this section, adjudication includes litigation and arbitration.

• (e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

• (f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.

LC 925 - Text

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• Ascension Insurance Holdings, LLC v. Underwood, 2015 Del. Ch. LEXIS 19 (1/28/15) • Vice Chancellor Glasscock rejected a Delaware corporation’s attempt to enforce a post-termination non-competition

agreement in which the parties designated California law against a California employee.

• Nuvasive v. Miles, 2018 Del. Ch. LEXIS 329 (9/28/18) • Vice Chancellor Glasscock Enforced post-termination non-competition agreement with California law and employee.

• Section 925(e) states new California public policy that individually represented employees can voluntarily elect out of the protections of California law, including California’s ban on non-competes.

• In a 6/7/19 Bench Ruling, Vice Chancellor Glasscock acknowledged evidence California employee had NOT been represented by counsel during negotiation of the non-competition agreement, and ruled Delaware choice of law provision not enforceable and that California law should apply.

• Vice Chancellor Glasscock most recently on 8/26/19, reconsidered his 9/28/18 decision in light of AMN Healthcare, and determined that employee non-solicitation agreements are void as against California policy, and granted California employee’s MSH arguing post-employment non-solicitation provisions unenforceable.

LC 925 – Now what?

©2019 Morrison & Foerster LLP

Protecting Trade Secret Information in M&A and Employee Mobility Situations

Stephanie Skaff

SEPTEMBER 5, 2019

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Increased Importance of Trade Secrets Trade secret litigation is on the rise ◦ More than 30% increase in 2018 over previous years ◦ 2019 Bloomberg Law Big Law Business Quick Pulse Survery – 33% say had

trade secrets stolen in last 10 years; 75% expect risk of TS theft to increase in next 5 years ◦ Increased attention by federal government on criminal trade secret

theft/espionage Possible reasons ◦ Increased employee mobility, particularly in technology industries ◦ Increased business combinations (M&As, joint ventures) ◦ Increasing tensions with China; concerns about economic espionage increasing ◦ More uncertainty about efficacy of patents, recognition that some IP better

protected by trade secrets

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Statutory Framework

UTSA and State Statutory Implementations ◦ Almost every state; some longer/more developed caselaw; preemption of

common law claims ◦ Variation in some key language and timing of adoption means that choice of law

still important

DTSA ◦ May 2016; original but not exclusive jurisdiction ◦ Also became predicate act for RICO claims ◦ Ex parte seizure provision, whistleblower protection

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Key Trade Secret Claim Elements Trade Secret

(1) Information Broadly defined: includes non-patentable information like “know-how”

(2) That Derives Economic Value from Not Being Generally Known/Known To Persons Who Could Make Economic Use Cf. to patents: public but granted monopoly on use/licensing Key area of disputes regarding “expert” employees with technical knowledge

(3) And Is Subject To Reasonable Measures to Protect Secrecy

Very factual – “reasonable under the circumstances”

Misappropriation ◦Acquisition by improper means, disclosure or use without/beyond consent

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Big Picture: Why Are Trade Secret Cases So Dangerous? Highly factual ◦ Use, secrecy, and degree of similarity required are all relative and provable by various means difficult to win at pleadings / summary judgment stages

◦ Emails, product development history, publications are all relevant expensive discovery Personal/emotional ◦ Intent/Wrongdoing

High exposure ◦ Trade secrets can be difficult to value flexible damages theories / large awards ◦ Often coupled with contract, federal claims, and/or other non-preempted claims ◦ Doubling (and even trebling) of damages, attorneys fees possible ◦ Criminal follow on and/or parallel proceedings

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$77M Judgment in NDCA: BladeRoom v. Facebook & Emerson Jury Trial

Trade secrets related to modular / pre-fabricated data centers & free air cooling system.

Case involved acquisition discussions (Emerson) and prospective contract for construction of massive data center facility (Facebook).

After learning BladeRoom’s system, Facebook hired Emerson to build its large data center in Sweden.

Emerson later announced its was using the “brand new” methods BladeRoom had taught it to build the facility.

Key Lesson: Use Best Practices in Deals and Business Contracts

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Trade Secret Risks: M&As, JVs and Other Business Relationships

Business Concerns The person most knowledgable about technology critical to due diligence or joint

venture efforts is often the same person tasked (now or in the future) with internal product development.

How do you undertake due diligence or enter a business relationship without risking future trade secret theft accusations?

Sharing your company’s trade secret information may be critical to a successful M&A and/or business relationship.

How do you protect against a potential acquirer or joint venturer misusing trade secrets you share during the diligence or business relationship?

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Trade Secret Risks: M&A, JVs and Other Business Relationships

Best Practices to Consider o Establish a deal “clean room” o Restrict information internally to “need to know” individuals o Clearly document any independent development o Shift risk by contract: requirements for marking/identifying trade secrets, providing only to

identified individuals, return/destruction, license o Disclose trade secrets only after developing high level of confidence and trust (for trade

secret owner); enter NDA or other confidentiality agreement only when required, or only for specific information (for acquirer)

o Consider other key contract terms – duration, choice of law/venue, limitations on liability, attorneys fees

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Defense Win in EDTX: Huawei v. CNEX Labs & Huang Jury Trial

Trade secrets related to SSD controller and networking technology.

Case involved an employee (Ronnie Huang) who was an expert in SSD technology, worked for short time at Huawei, and then left Huawei to co-found start-up CNEX Labs developing next generation SSD controllers.

After Huang left, Huawei claimed they owned the SSD patents/patent applications he filed at CNEX under the terms of his employment agreement; later alleged that he had also stolen their SSD trade secrets.

CNEX learned during discovery that when Huawei’s SSD development stalled after Huang left, Huawei had implemented illegal “countermeasures” to try to obtain CNEX’s trade secret technology.

Key Lessons: Pay attention to EA terms, on-board and exit procedures; trade secret hygiene.

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Business Challenge In specialized technical fields, there are often a small number of subject matter

experts who are valuable new hires precisely because of their knowledge & experience.

How do you gain the benefit of their expertise without exposure to trade secret infiltration?

How do you protect against misappropriation of company secrets if they leave?

Trade Secret Risks: Onboarding and Exiting High Value Employees

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Best Practices to Consider

Onboarding: Require representations in agreements & ask about prior obligations

Wall off any employees with non-solicit obligations from recruiting

Consider third party forensic analysis of devices (for high value employees)

Carefully document technology development, including tight, vigilant version control on essential architectural specifications, design docs, source code change logs, etc.

Make sure your EAs comply with CA law and protect confidential and trade secret information

Follow best exit practices : exit interviews, devices and documents, technical safeguards

Trade Secret Risks: Onboarding and Exiting High Value Employees

An Update on Privacy and Data Security Laws Affecting California Employers

A general overview of privacy and data security laws impacting your business

What Is Data Privacy Law And Who Does It Impact? • Data Privacy Laws deal with personal data and the use of that data

• No single, omnibus data privacy law in U.S. • Federal statutes primarily sector-specific; state statutes more focused on rights of

individual consumers • Data Privacy Laws generally based on principle that an individual has an expectation

of privacy, unless diminished or eliminated by agreement • Data Privacy Laws impact any business that collect information from

customers, clients, employees, or other businesses, in any form. (THIS IS EVERY ORGANIZATION!)

• State Data Breach Notification Laws – As of 2018, all 50 U.S. states require customer notification of security breaches involving personal information. Many also have established minimal “reasonable” standards to protect consumer data. In CA, the attorney general published guidelines on what are “reasonable” security standards.

• California Online Privacy Protection Act (CalOPPA) – Requires commercial websites and online services collecting PII from California consumers to post a conspicuous privacy policy.

• Telephone Consumer Protection Act – Imposes restrictions on telemarketing. • CAN-SPAM laws – Places restrictions on email marketing. • Federal Trade Commission – The FTC is broadly empowered to bring enforcement actions to

protect consumers against unfair or deceptive practices. The FTC has taken the position that “deceptive practices” include a company’s failure to comply with its published privacy policy and its failure to implement “reasonable” security measures to protect consumers’ personal information. Through its consent decrees, the FTC has provided extensive guidance with respect to regulatory expectations.

Other Important Privacy Laws General Consumer Privacy and Data Security Laws:

Important Privacy Developments In 2018 • EU General Data Protection Regulation (GDPR) - Europe’s framework for

data protection laws for companies that may collect or process EU residents’ data; GPDR rules have a global reach as they regulate any international company which collects or processes EU residents’ data.

• California Consumer Privacy Act and SB 1121 - EU GDPR-style rights for

California residents around data ownership, transparency, and control.

GDPR: Brief Summary General principles: ◦ Processing is illegal unless specifically legal ◦ Be clear and transparent about processing

Primary principles and values: ◦ Empower individuals (choices and rights) ◦ Lawfulness, fairness, and transparency ◦ Purpose limitation ◦ Data minimization ◦ Storage and retention limitations ◦ Security ◦ Accountability

CCPA: Brief Background

California’s Consumer Privacy Act (Civ. Code §§ 1798.100 - 1798.199) ◦ First of its kind legislation in the United States ◦ Signed into law June 28, 2018; provisions become operative, January 1, 2020;

enforcement by AG delayed until July 1, 2020 ◦ Unusually rushed legislative process (debated only six days and passed on the

condition that a ballot initiative with similar focus be withdrawn) ◦ Adds to the many existing data privacy laws in California ◦ Already one amendment (SB 1121), likely more this year

CCPA: Who and What Data is Protected? Protects all CA residents with respect to “any information that relates” to

them Californians are protected in their roles as “consumers” ◦ Broad definition of “consumer,” which is defined to mean any “natural person who

is a California resident.” Civ. Code § 1798.140(g) “Personal information” is also defined broadly and is defined as “any

information that … relates to … a particular consumer or household.” Civ. Code § 1798.140(o)(1)

CCPA: Who Must Comply?

For-profit companies of all types and affiliates operating under the same brand (even if affiliate does not meet “threshold” below)

Threshold for application: ◦ Annual gross revenues of $25MM; ◦ Handle, buy, share or sell personal information belonging to 50,000 or more California residents,

households, or devices annually; OR ◦ 50% or more annual revenue from selling California residents’ personal information.

Exempted Companies ◦ A company without a physical presence or affiliate in CA if it can ensure that its “commercial

conduct takes place wholly outside of California” and that it is not doing “business in the State of California.”

CCPA: Who Must Comply? (cont’d)

Other Exceptions: ◦ CCPA does not apply to personal information governed by HIPAA, GLBA, CMIA,

FCRA, Driver’s Privacy Protection Act of 1994 Note – HIPAA and GLBA exceptions do not apply to private right of action for data breach

and non-covered entities ◦ Certain clinical trial information ◦ Sale of personal information to or from a consumer reporting agency per FCRA ◦ Law does not prevent business’s ability to comply with laws, legal inquiries or

summons, cooperate with law enforcement, exercise or defend legal claims, collect or use de-identified info

CCPA: Enforcement and Remedies

California AG is tasked with enforcing the entire law ◦ AG can bring a civil action for injunction or penalties of up to $7,500 per intentional

violation or $2,500 per unintentional violation ◦ Business has 30 day right to cure after notice of alleged violation ◦ Definition of “violation” unclear

Private Right of Action: ◦ limited to a organization’s alleged failure to “implement and maintain reasonable

security procedures and practices” that results in a data breach with regard to specific personal information (CCPA § 1798.150(c)) ◦ May recover between $100 to $750 per incident or actual damages, if greater ◦ Plaintiff need not show actual harm ◦ Includes theft of electronic or paper files

CCPA: Enforcement and Remedies (cont’d)

What’s Brewing in 2019 and Beyond AG regulations and more amendments to CCPA AB 25: Employment data exemption ◦ Clarifies employee data is excluded from many CCPA requirements ◦ Agreement to address employee data in 2020 – stay tuned! ◦ Employers still required to inform employees what types of information they are

collecting and the reasons for collecting it ◦ Exemption for employee data does not apply to the private right action

More GDPR enforcement actions SEC penalties on public companies Biometric data – increased regulation coming? Increased litigation over use of private information generally? (CA Bus. & Prof. Code §§ 17200–210)

QUESTIONS?

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:

Thank You For Attending! Tyler Paetkau

California Lab or ©Employment Law Volume 32 No. 4

July 2018

aamKKmrn Official Publication of the California Lawyers Association Labor and Employment Law Section

Tyler M. Poetkou is a partner in the Silicon Valley office of Procopio, Cory, Hargreaves & Sovitch LLP. He represents employers in oil aspects of labor and employmenf low. He con be reached af tyler.paetkau@procopio.com and (650) 645-9027.

1. INTRODUCTION

It was probably inevitable that most employers would adopt “bring your own device” (BYOD) to work policies in light of the proliferation of smartphones, iPads, laptops, tablets, and other portable electronic devices. It is expensive and often impractical for employers to purchase portable devices for employees’ work use. BYOD to work policies are far more efficient and practical. Employees are now accustomed to using their personal devices at the workplace, and while at work taking breaks to shop online, post Yelp reviews, check the hockey scores, and conduct other personal business. But employers should make no mistake: they are inviting a host of legal and practical problems by allowing—and in some cases encouraging and requiring—employees to use their own personal devices for work. This article summarizes the emerging legal and practical problems with BYOD to work policies, then offers some practical suggestions for employers to manage and mitigate the legal risks inherent in such policies.

II. LEGAL AND PRACTICAL PROBLEMS WITH BYOD TO WORK POLICIES

Employers necessarily cede a certain amount of control by allowing, or requiring, employees to use their personal devices for work purposes. Employees typically use their personal cell phones, for example, to conduct personal business, both during and outside work time. Allowing or requiring employees to use their personal devices necessarily means that the employer’s data, and sometimes its most sensitive information, including trade secrets, may reside on employees’ personal devices. BYOD policies also mean that it is much more likely that rogue employees may transfer, save or use their employer’s data. BYOD policies increase the risk of data breaches and hacking.

A. Challenges Protecting Employers’Trade Secrets and Other Proprietary

and Confidential InformationSince “trade secrets” must derive their value “from not

being generally known to the public or to other persons who can obtain economic value from [their] disclosure or

— Inside the Law Review —

1 MOLE Self-Study: Managing the Legal Risks Inherent in BYOD to Work Policies

9 Employment Law Case Notes ] 11 Wage and Hour Case Notes j 15 Public Sector Case Notes

1 9 NRLA Case Notes I 22 Cases Pending Before the California Supreme Court

25 Message from the Chair

use” (Civil Code § 3426.1(d)(1)), and given that the second prong of a trade secret misappropriation claim is that the information be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy” (§ 3426.1(d)(2)), BYOD policies and practices can cause the loss of valuable trade secret status. That is, the employer is necessarily losing some control over the vital “secrecy” element of a trade secret misappropriation claim by allowing employees to download information onto their private devices. It is therefore important to implement appropriate policies and protocols, and train all employees, as discussed further below.

Courts have begun considering whether an employee’s social media contacts qualify for trade secret protection.^ Courts also are considering the effect of employees using their personal devices on the protection of employers’ trade secrets. For example, in an unpublished 2011 opinion from an Illinois appellate court, the court held that a company’s bidding system and the bids themselves were not trade secrets, in part because the company’s project managers were permitted to take their laptop computers anywhere, including their homes, “indicating a lack of concern with the security of the information on the laptop computer.”^

B. Inadvertently Obtaining Third Parties’ InformationEmployees may decide to connect

their own technology, or worse yet, a former employer’s technology, to the current employer’s network. Employers may thus inadvertently find themselves in unwanted and expensive trade secret misappropriation litigation. This may result in tens of thousands of dollars in computer forensics costs to permanently remove the non-company data from the employer’s network. In the recently settled Waymo v. Uber litigation in the Northern District of California, Uber contended that Mr. Lewandowski downloaded Waymo’s data without Uber’s knowledge, permission or

consent, and U.S. District Judge Alsup issued a preliminary injunction ordering Uber to quarantine and not use Waymo’s data allegedly stolen by Mr. Lewandowski.^

C. Potential Overtime LiabilityWhen nonexempt employees use

their personal devices before or after “normal” work hours to check work email or voicemail, make calls, or send text messages, the time is generally compensable.^ To avoid liability, including for overtime, the most conservative practice is not to issue such devices to nonexempt employees. However, if the employer does issue these devices to nonexempt employees, a policy should be in place prohibiting them from working after hours and imposing disciplinary consequences for violations of the policy. The employer also should have policies requiring nonexempt employees to record and submit for payment all time worked, i.e., a “no off-the-clock work” policy.

In Allen v. City of Chicago,^ a police officer sued the City of Chicago for unpaid overtime related to off-the-clock usage of his smartphone. The officer alleged that the police department issued police officers electronic devices and required them to respond to work- related emails, text messages, and voicemails around the clock while off duty. The court conditionally certified a class of all police officers employed by the City that were required to carry smartphones, and in October 2014, denied the City’s motion to decertify the class. The case is still pending.

D. Employee Privacy Rights May Interfere With Recovery

of Employers’ DataEmployers often encounter

problems obtaining their proprietary data and trade secrets back from employees who resign or are involuntarily terminated; in many cases, terminated employees leave with their employers’ proprietary data and trade secrets still on their personal devices. Employers are often surprised to learn

that they do not enjoy unfettered access to months, if not years, of current and former employees’ emails, text messages and records from their personal cellular phones and other personal devices. Even in litigation, more and more courts rule that such broad requests for access to employees’ personal devices, even those used for work purposes, are grossly overbroad, unduly burdensome, and impermissibly invasive of current and former employees’ constitutional and common law privacy rights.^ Courts have ruled that employees have a reasonable expectation of privacy in their private cellular phones and other devices, even if they use them for work purposes, and their employer does not have possession, custody or control over the contents of such devices.^

Employees will predictably resist attempts by their employer or former employer to obtain indiscriminate access to the entire contents of their electronic correspondence with their former co-workers, friends and acquaintances that implicate their privacy rights and are irrelevant to the employer’s data or to the issues in dispute. Moreover, a stipulated protective order approved by a court in litigation may not justify an unrestricted fishing expedition into private communications that are not directly relevant to the disputed issues.®

On the other hand, if the employer clearly puts its employees on notice not only that the employee has no reasonable expectation of privacy when using company devices, and that the employer reserves the right to monitor employees’ online and electronic activity (e.g., internet usage and. sites visited, telephone calls, emails and text messages), even an employee’s seemingly privileged communications may not be privileged. Indeed, when the electronic means by which an employee sends a communication with his or her attorney belongs to the employer, the employer has advised

2 California Labor & Employment Law Review Volume 32, No. 4

the employee that communications using electronic means are not private, may be monitored, and may be used only for business purposes, and the employee is aware of and agrees to these conditions, the communication is not privileged.^ To the contrary, such communications are “akin to consulting [the] attorney in one of [the employer’s] conference rooms, in a loud voice, with the door open, yet unreasonably expecting that the conversation overheard by [the employer] would be privileged.”^®

Under such circumstances, the employee’s email communications with his or her own lawyer do not constitute “confidential communication between client and lawyer” within the meaning of California Evidence Code § 952.^^ Holmes v. Petrovich Develop. Co., 191 Cal. App. 4th 1047 (2011), is directly on point. In Holmes, the employee argued that “she believed her personal email would be private because she utilized a private password to use the company computer and she deleted the emails after they were sent.”^^ The court found that “her belief was unreasonable because she was warned that the company would monitor email to ensure employees were complying with office policy not to use company computers for personal matters, and she was told that she had no expectation of privacy in any messages she sent via the company computer.”^^ The Holmes court repeatedly stressed that the employee had used a company computer, and, in light of the employer’s clear policy prohibiting the personal use of company computers, did not distinguish between the use of a company email address and a personal email address.

In marked contrast, in Stengart v. Loving Care Agency, Inc.,^'^ a New Jersey state court ruled that the employer was not entitled to access to the employee’s private email account “where the use of such an account was not clearly covered by the company’s policy.”^^ Indeed, the policy in Stengart, in contrast to the employer’s policy in Holmes, did not clearly state that any non-work-related

use of the “company computers” is prohibited and subject to search; instead, it referred, vaguely, to “the company’s media systems and services,” and did not define those terms.^^ Instead, an employer’s computer/BYOD use policy and/or employee handbook legally can, and should, make it crystal clear that there is no privacy expectation in any messages sent from the “company’s computers” and “Blackberrys or other wireless devices,” i.e., the physical hardware devices issued to or used by its employees, irrespective of whether the message comes from an company email account or a personal email account.

E. Increased Risk of Data and Security Breaches

Nearly all states now have laws requiring companies to notify affected consumers of a data breach.^^ Although so far the headlines have featured customer and consumer privacy, such data breach notification laws apply equally to affected employees. With the dramatic increase in identify theft, hacking, internet scams, phishing and the like, employers are likely to experience data breaches. BYOD to work policies increase the risk that rogue employees and non-employee bad actors will breach employers’ security protocols and barriers.

F. Business Expense Reimbursement issues

California Labor Code § 2802 requires employers to “indemnify” employees for all expenses incurred “in direct consequence” of employment duties. Section 2802 generally requires employers to reimburse employees for all reasonable business expenses. In Cochran v. Schwans Home Servs., Inc., 228 Cal. App. 4th 1137, 1144-45 (2014), the California Court of Appeal held that employers must reimburse employees for at least a pro-rata portion of their cell phone expenses to the extent that employees use their personal cell phones for work. The appellate court held that when an employee

“must” use his personal cell phone for work-related calls, the employer must reimburse him or her and that the “reimbursement owed is a reasonable percentage of the cell phone bills.” The Cochran holding extends to other personal devices, including iPads, laptops, servers, cloud storage, internet subscriptions and tablets, that employees use for work purposes. (In Cochran, the appellate court affirmed the trial court’s certification of a class of employees on the cell phone reimbursement claim.)

G. Litigation IssuesLitigators and most litigants

understand the importance of “litigation holds,” requiring the preservation of all relevant evidence once a claim is threatened or asserted, including suspension of any automatic data deletion policies and protocols. But how does an employer effectively implement a litigation hold when much of the data is on employees’ private cell phones and other personal electronic devices? Can an employer be penalized if current employees delete such relevant data? Can a jury draw an adverse inference from such data deletions? What about discovery requests, including subpoenas, for employees’ private cell phone records and text messages?

III. PRACTICAL TIPS FOR BYOD TO WORK POLICIES

The many risks inherent in BYOD to work policies are obvious: employees enjoy a greater expectation of privacy; valuable information (including employers’ trade secrets) becomes less secure and more difficult to secure; employees may leave with the employer’s data on their devices upon separation of employment; employees may have the right to reimbursement for business use of their portable devices; employers may unwittingly incur overtime liability for “off hours” work; and data breaches are more likely. How do employers manage

Volume 32, No. 4 California Labor & Employment Law Review 3

and balance these real legal and practical risks against the convenience, efficiency and productivity of BYOD to work policies? In the modern workplace, personal devices are ubiquitous and now employees use their personal devices to work virtually anywhere at any time.

Employers should carefully consider appropriate policies and employee training to manage the risks of BYOD to work policies. The following sections address some common concerns.

A. General Policy ElementsEmployers should implement

careful policies governing BYOD to work, and train all employees on them. Key elements of effective policies and training include: (1) scope (who, what, and when is covered?); (2) definitions (social media, types of devices); (3) terms of use; (4) company-affiliated social media; (5) the expectation of privacy on company devices and BYODs; and (6) no retaliation.

B. Checklist: Set Minimum Technical Requirements for

Employees’ Personal Devices1. Grant the employer access for

business purposes;2. Require installation by IT of

Company-specific security software;3. Require cleaning of work-related

information on device by IT upon separation of employment or in other circumstances dictated by business needs (“remote wipe” if lost/stolen);

4. Employees should back up personal information to a separate device;

5. Employers are not responsible for lost personal information;

6. Restrict personal use during working hours;

7. Require password protection (see below);

8. Define acceptable/unacceptable use;9. Regulate cloud syncing and access;10. Define Company communications

as property of the Company;

11. Disclose that employees have no expectation of privacy when using even a personal device for work purposes, or when using the Company’s network or systems (see below);

12. Consider allowing employees to have a “zone of privacy” on the device for personal use;

13. Consider prohibiting email access for non exempt employees to minimize the risk of overtime liability;

14. Consider “remote wipe” and “tracking” tools;

15. Address BYOD policies during the onboarding process, during employment, and at the termination of employment;

16. Set protocols for appropriate use and data protection;

17. Establish confidentiality of trade secrets and the Company’s restrictions; and

18. Create consent to access.

C. Legally Diminish Employees’ Privacy Expectations

Since the employee owns the device and the account, employers should take steps to minimize the employee’s reasonable expectation of privacy so that it can inspect and alter the devices for business reasons. For example:

1. “All Company computers and email systems are the Company’s property, to be used solely to facilitate the business of the Company”;

2. “Employees are strictly prohibited from using Company computers and email systems for personal reasons”;

3. “Employees should expect that all information created, transmitted, downloaded, received or stored in Company computers and email systems may be accessed [and monitored] by the Company at any time without prior notice”; and

4. “Employees should not assume they have an expectation of privacy or confidentiality in such messages or information.”

D. Security Software Precautions

Most employees do not have sufficient security software to protect trade secrets and other confidential information on their personal devices. Therefore, employers should implement measures to protect the information to minimize the risk of data breaches. An employer should develop a comprehensive information security policy, circulate it to its employees, and request annual execution of the policy by the employee stating that the employee has read and understands the policy. Employers should require a password or PIN on each mobile device that may allow access to or contain the employer’s trade secret and proprietary information. Consider requiring a unique login and password for each system containing proprietary information that an employee may access from a mobile device. The remote access should be set so that after a certain period of inactivity, automatic logout occurs. Employers should regularly audit employees’ personal devices to ensure that passwords and/or PINs are being used and are secure. Employers should require automatic expiration of passwords and/or PINs and require new ones be set by employees periodically.

Employers should consider requiring employees to install software on the mobile devices that would grant the employer the authority to override personal passwords and to wipe the device remotely in the event that the device is lost, stolen, or otherwise compromised. Employers should consider managing employees’ mobile devices using “mobile device management” (MDM) software, which allows employers to remote wipe and encrypt either all information on the device or just Company information.

4 California Labor & Employment Law Review Volume 32, No. 4

Employers should consider restricting employees’ ability to electronically transfer the employer’s trade secrets and other confidential and/or proprietary information. Allowing employees to send via their personal devices, save to portable storage devices, or print or take screenshots of proprietary information may comprise the information’s status as a trade secret. Therefore, to the extent possible, such activity should be limited, if not prohibited outright. These restrictions can be integrated directly into the electronic systems and should be incorporated into the employer’s written policies.

E. Mark All Trade Secretsas “Trade Secrets”

Remarkably, many employers do not take the most simple, basic step of carefully handling and marking or labeling their confidential, proprietary, or trade secret information accordingly. “While labeling information ‘trade secret’ or ‘confidential information’ does not conclusively establish that the information fits this description [citations], it is nonetheless an important factor in establishing the value which was placed on the information and that it could not be readily derived from publicly- available sources.”^^

F. Special Considerationsfor Third Parties

Employers face additional risks by posting trade secrets “in the cloud” or on cloud-based storage sites like DropBox. Since the employer’s trade secrets and other proprietary information are being hosted by an unknown third-party provider, there is an increased risk that the information could leak to the public, thus eviscerating trade secret protection. Employers hosting trade secrets in cloud-based storage also face challenges in recovering trade secrets and other information

following a breach. Moreover, there may be uncertainty over which jurisdiction’s laws apply (particularly if the server is not located in the U.S.). For these reasons, if employers choose to store trade secrets and other proprietary or valuable information in the cloud, they should negotiate a robust contract with the cloud service provider, which includes prohibitions on any disclosure to third parties and clearly defines the terms of the provider’s services.

G. Reimbursement of Business Expenses

Employers should consider other security measures, such as providing employees with a “virtual private network” (VPN), or an employer- owned mobile “hot spot” available to its employees, to avoid potential claims for reimbursement of the cost of the employee’s choice in home Internet access. California employers generally must reimburse employees for such business-related expenses, “overhead,” and costs of doing business under Labor Code § 2802.

H. Written Warranties That Employees Are Taking Adequate Precautions

Employers should consider requiring employees using mobile devices to access the employers’ trade secrets and other proprietary information to agree in writing that they will make reasonable efforts to secure the information. Employers should consider incorporating into expense reimbursement forms for personal devices, and BYOD to work policies, a printed certification from the employee to the effect that reasonable efforts have been made to secure all confidential or proprietary information contained on the device.

I. Periodic Reminders andEmployee Training

Employers should periodically remind employees of the importance of protecting the employer’s trade secrets and other proprietary and confidential information. Employers can include “pop up” boxes and electronic acknowledgements each time that an employee logs into a system containing proprietary information. Employers also should consider periodic email and Company Intranet site reminders, and reiterate such reminders during the onboarding process and during general employee meetings.

J. Removal or Deletion of Data Upon Separation

Require departing employees to provide their personal devices so that the employer’s IT experts can permanently remove all Company data and particularly trade secrets (e.g., business plans and strategies, customer and confidential financial data).

K. Exit InterviewsRemind departing employees

of their previously executed confidentiality agreements and explain that the obligations are ongoing. Consider using a checklist:

1. “Do you have any Company documents in your possession or under your control?”

2. “Have you given any Company documents or information to anyone outside the Company?”

3. “Do you still have access to any Company documents?” If so, which documents? Where are these Company documents located now?”

4. “Do you have any Company documents or materials at home?”

5. “Have you returned all flash drives that contain Company information?”

Volume 32, No. 4 California Labor & Employment Law Review 5

Employers should consider requesting that the employee sign an affidavit or certification confirming that he or she does not have any Company documents in his or her possession, will promptly return any Company documents that he or she may later discover, and that he or she has conducted a diligent search for Company documents and has returned everything to the Company. In addition, upon the voluntary or involuntary termination of an employee’s employment, employers should consider saving forensic copies of the data on any mobile devices used to access the employer’s trade secrets and other proprietary information, and then purging the data on the device and deactivating any user names and passwords issued to that employee that would allow access to the employer’s trade secrets and other proprietary information.

ENDNOTES1. See Cellular Accessories for Less

V. Trinitas LLC, No. 12-cv-06736, 2014 U.S. Dist. LEXIS 130518, 2014 WL 4627090, at *4 (C.D. Cal. Sept. 16, 2014) (denying motion for summary judgment as to whether Linkedin contacts qualified as trade secrets because issues of material fact remained about whether the contacts were kept sufficiently private); PhoneDog v. Kravitz, No. C 11-03474, 2011 U.S. Dist. LEXIS 129229, 2011 WL 5415612, at ^7 (N.D. Cal. Nov. 8, 2011) (denying motion to dismiss claim under California Uniform Trade Secrets Act when employer sued former employee who continued to use a company-issued Twitter account that had 17,000 followers).

2. Meade Elec. Co. Inc. v. Wicks, No. 1-09-2933, 2011 111. App. Unpub. LEXIS 1331 (111. App. Ct. May 9, 2011).

3. Waymo LLC v. Uber Techs., Inc., No.

C 17-00939 WHA, 2017 U.S. Dist. LEXIS 73843, 2017 WL 2123560 (N.D. Cal. May 11,2017).

4. See, e.g, Ruffi v. Lojack Corp., Inc., 596 F.3d 1046, 1054-55 (9th Cir. 2010) (time spent by employee after completion of last job for day in transmitting data to employer from employee’s home may be integral to employee’s principal activities if more than de minimis); cf. Ghazaryan v. Diva Limousine, Ltd., 169 Cal. App. 4th 1524, 1534-35 (2008) (whether limousine drivers’ “on call” time should be included in “hours worked” for overtime compensation). Note that at the request of the Ninth Circuit Court of Appeals, the Supreme Court of California agreed to decide whether the federal (ELSA) “de minimis” doctrine applies to claims for wages under the California Labor Code. See Toester v. Starbucks Corp., No. S234969, 2014 U.S. Dist. LEXIS 37728 (Aug. 17,2016).

5. No. lO-C-3183, 2013 WL146389, 2013 U.S. Dist. LEXIS 5394 (N.D.111. January 14,2013).

6. See Dart Indust. Co., Inc. v. Westwood Chem. Co., Inc., 649 F. 2d 646, 649 (9th Cir. 1980) (“[tjhere appear to be quite strong considerations indicating that discovery would be more limited to protect third parties from harassment, inconvenience ...”); Exxon Shipping Co. v. U.S. Dept, of Interior, 34 F.3d 774, 779 (9th Cir. 1994) (nonparties afforded “special protection against the time and expense of complying with subpoenas”).

7. See Holmes v. Petrovich Dev. Co., 191 Cal. App. 4th 1047, 1068-71 (2011); United States v. Slanina, 283 F.3d 670, 676 (5th Cir. 2002); Leventhal v. Knapek, 266 F.3d 64, 73-74 (2nd Cir. 2001); Matthew Enter, v. Chrysler Grp. LLC, 2015U. S. Dist. LEXIS 166553 at ^13-14 (N.D. Cal. 2015); Mintz v. Mark Bartelstein & Assocs., 885 F. Supp. 2d 987,998 (C.D. Cal. 2012); United States V. YudongZhu, 23 F. Supp. 3d 234, 238-39 (S.D.N.Y. 2014); In re the Reserve Fund Secs. & Derivative Litig, 275 F.R.D. 154, 160 (S.D.N.Y. 2011); Pure Power Boot Camp, Inc.V. Warrior Fitness Boot Camp, LLC, 587 F. Supp. 2d 548, 560-61 (S.D.N.Y. 2008).

8. “[A] protective order, while laudable, is only available a/ter valid discovery has been ordered.” Boler V. Superior Court, 201 Cal. App. 3d 467, 475 (1987) (emphasis in original).

9. Holmes, 191 Cal. App. 4th at 1068.10. Mat 1051.11. Id.12. Jd. at 1069.13. Id.14. 990 A. 2d 650 (2010).15. M. at 1068.16. Stengart, 990 A. 2d at 659.17. California, for example, revised its

data breach notification laws last year to require notification even when the personal information involved in the breach is encrypted. Cal. Civ. Code §§ 1798.29 and 1798.82 (Jan. 1,2017).

18. Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514,1522 (1997).

CLAICALtFORNIA LAWYERS ASSOCIATION

This article is available as an online self-study test.

(1 self-study credit for $20!)Visit:

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6 California Labor & Employment Law Review Volume 32, No. 4

FALL 2018 TODAY’S GENERAL COUNSEL

46

Compliance

Y ou’ve invested a lot in your em-ployee base. At considerable cost, you’ve found the right people, de-

veloped and trained them, and disclosed to them some or all of your treasured intellectual property. Now you want to keep some other company from reaping the benefits of your investment.

And you know which other compa-nies would be most interested in your employees and would like to protect their investments rather than engage in a bidding war over employees. So....

STOP THERE! That last thought can lead to disastrous consequences.

Even if you have no products that compete with another company, that company can be your competitor for employees. And competition triggers antitrust laws. The Antitrust Division took numerous executives and Human Resource staff by surprise with its intense campaign against no-poach (i.e., em-ployee non-solicitation) agreements. The

Protecting Investments in IP and PeopleBy Roxann E. Henry and Eric Akira Tate

Division followed its civil enforcement actions against prominent Silicon Valley companies by creating the Antitrust Guidance for Human Resource Profes-sionals in October 2016.

The Antitrust Division continues to expand the antitrust risk related to agree-ments about employees. Agreements not to compete can subject a company to criminal fines of up to $100 million or double the loss or gain from the agree-ment. Individuals involved in such agree-ments face a statutory maximum of 10 years in prison. The Guidance explicitly notes the availability of such criminal sanctions. The antitrust laws also provide for victims to sue for treble damages and recover their attorneys’ fees. Shareholder suits have challenged boards and execu-tives who do not implement adequate compliance programs, or misstate earn-ings reports due to antitrust violations.

Follow-on consequences from gov-ernment enforcement arrive swiftly. On

April 3, 2018, the Antitrust Division announced a civil settlement regarding a no-poach agreement that had come to light in the context of a merger review. Only 13 days later, the first of follow-on antitrust treble damage class actions was filed.

To give some sense of the incen-tive for lawyers bringing these claims, $604 million in civil settlements from the earlier follow-on civil cases involving Silicon Valley companies garnered two of the biggest payouts in class counsel attorneys’ fees and costs in federal courts in California in the last eight years. Most importantly, in announcing an April 3, 2018, no-poach agreement settlement, the Antitrust Division reiterated that “it intends to bring criminal, felony charges against culpable companies and individu-als” and that it has instituted “a broader investigation into naked agreements not to compete for employees.”

EMPLOYEE MOBILITYThe Antitrust Division’s current focus is consistent with a growing movement to limit the use of non-competition agreements and restrictions on employee mobility. In April 2018, Congress an-nounced the introduction of bills in both the House and Senate that included the Workforce Mobility Act of 2018 (WMA) and the End Employer Collu-sion Act (EECA).

The WMA would make it unlawful for an employer to enter into a covenant with an employee not to compete; and it creates a private right of action allowing a prevailing employee to collect damages, including punitive damages, and reason-able attorneys’ fees and costs. The WMA does permit agreements barring the employee from disclosing trade secrets.

The EECA would bar any agreement between two employers that prohibits or restricts one employer from soliciting or hiring another employer’s employees or former employees. The EECA would offer the same remedies as the WMA

TODAY’S GENERAL COUNSEL FALL 2018

47

Compliance

but does not include any exceptions. Similar bills are being considered in

several states. This is not the first time bills of this nature have been proposed in Congress or state legislatures, and the likelihood of any passing into law is uncertain, but they are examples of the interest in reducing restrictions on employee mobility.

Courts also appear to be applying greater scrutiny to non-competition agreements. For example, in Delaware,

a state long known for having some of the most supportive laws favoring corporations, recent state court deci-sions suggest greater recognition for employee mobility considerations.

In Ascension Insurance Holdings v. Alliant Insurance and Roberts Un-derwood (January 2015), a Delaware company sought to enforce a non-competition provision with a California employee when the parties had consented to Delaware venue and application of Delaware law. The Delaware Chancery Court, however, declined to enforce the Delaware choice of law provision, holding that California had a greater interest in the action, and California pub-lic policy would be violated if Delaware law were applied, as the non-competition provision would be enforceable.

PROTECTIONS EXISTMany employers have asked the ques-tion, can we lawfully do anything to protect our significant investments in our people, who often carry with them our most competitively sensitive IP? The answer is yes.

The vast majority of states still enforce non-competition agreements that are rea-sonable in scope. Restrictive covenants

with individual employees that are less restrictive than non-competition agree-ments (e.g., employee non-solicitation agreements) still appear to be universally enforceable. Employers everywhere are still free to require employees to sign confidentiality and non-disclosure agreements to protect their most sensi-tive information.

Further, even the Antitrust Division has recognized that there are situations where employee non-solicitation provi-sions are permissible, including when:

• Contained within existing and future employment or severance agreements;

• Reasonably necessary for merg-ers or acquisitions, investments or divestitures, including related due diligence;

• Reasonably necessary for contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies, or providers of temporary employees or contract workers;

• Reasonably necessary for the settlement or compromise of legal disputes; or

• Reasonably necessary for contracts with resellers or original equipment manufacturers (OEMs), contracts with providers or recipients of ser-vices other than those enumerated above, or the function of a legiti-mate collaboration agreement.

Indeed, the Antitrust Division men-tions in its Guidance that no poaching agreements that are reasonably neces-sary to a larger legitimate collaboration between employers, including legiti-mate joint ventures, are not considered per se illegal under the antitrust laws.

TAKEAWAYS• Non-disclosure, non-compete and

non-solicitation agreements with individual employees can assist an effective IP protection program and are enforceable in most states.

• Don’t assume that courts will enforce restrictive covenants simply because an employer and employee agree to them, or that you can avoid

Roxann Henry is a partner in the Global Antitrust Law Practice of Morrison & Foerster. She is the former chair of the Antitrust Sec-tion of the American Bar Association. She

has over 30 years of experience defend-ing companies and individuals in antitrust government investigations; she also assists companies with antitrust compliance. rhenry@mofo.com

Eric Akira Tate co-chairs the Global Employment and Labor Practice of Morrison & Foerster. He is expert in the area of trade secrets and employee mobility, and co-chairs

the Covenants Not to Compete and Trade Secrets Subcommittee of the American Bar Association’s Labor & Employment Section.etate@mofo.com

antitrust problems just because you explain what you are doing to the affected employees.

• Beware entering into non-solicita-tion and similar agreements (partic-ularly about setting wage rates) with other companies, as it may violate antitrust law.

• Look at your compliance program; include HR personnel in the anti-trust training and consider whether written materials need updating.

• Continuing competition won’t stem prosecution if there is an agreement on some phase of the process that is not ancillary and required for a legitimate competitive purpose. For example, the companies may be vigorously competing for employees, but agreements to set benefit levels could still be criminal.

• If you find a problem that was not terminated before October 2016, you may want to consider an appli-cation under the Antitrust Division’s Leniency Policy, which provides for criminal amnesty for the first to disclose an antitrust violation. ■

The vast majority of states still enforce non-competition agreements that are reasonable in scope.

KEEPING UP WITH THE LATEST ON THE CALIFORNIA CONSUMER PRIVACY ACT By Procopio Senior Counsel Elaine F. Harwell, CIPP/US

The California Consumer Privacy Act (CCPA) is a bit of a moving target. Since its passage and as we have

previously addressed here and here, lawmakers anticipate making changes to the law before it takes effect January

1, 2020. Indeed, by one count, the state legislature has seen as many as 18 amendments, ranging from minor

grammatical changes to significant modifications to its scope. This sweeping new privacy legislation is riding the

wave of heightened attention on high-profile data breaches and privacy miscues. It imposes a number of new

obligations on covered businesses while granting new rights to California residents.

What’s happening on the legislative front? Here’s

the latest, starting with significant legislation that

has passed.

Amendments Passed Out of Committee

AB 25 – Employment data exemption

Possibly the bill with the most wide-reaching

implications, amendment AB 25–-relating to the

exemption of employment data–-has passed out of committee, but with important amendments to the language

since its introduction. This bill initially proposed to redefine “consumer” to exclude job applicants, employees,

contractors and agents whose personal information was collected and used in the context of the employment

relationship.

In short, the bill proposed to exclude from the CCPA any information an employer business collects from an

employee consumer in the employment context. Labor unions, privacy groups and others came out in opposition

to AB 25, arguing the exemptions go too far in eroding the rights of employee consumers, specifically with regard

to employee monitoring.

To address some of the issues raised in opposition, the exception has been limited and it now also includes a

sunset provision after one year. The amended bill clarifies that while employee data is excluded from many

CCPA requirements, employers would be still required to inform employees what types of information they are

collecting and the reasons for collecting it.

Additionally, the bill’s exemption for employee data does not apply to the private right action. Thus, employees

impacted by a data breach may still bring civil actions pursuant to the rights set forth in section 1798.150 of the

law.

As part of the compromise to get the billed passed, the stakeholders agreed to more comprehensive discussions

over employee privacy legislation in 2020. Hence, watch out for additional legislation in the next year to further

address concerns surrounding the use of employee personal information.

AB 1564 – Methods for consumers to submit requests

As originally passed, the CCPA required that businesses make available to consumers two or more methods to

submit access requests, including, at a minimum, a toll-free number and a web address. The proposed bill

removed the requirement that businesses make a toll-free number available to consumers and instead required

either the toll-free number or an email address and a mailing address. Ultimately, AB 1564 passed with an

amendment that allows online-only businesses to provide just an email address for consumers to exercise their

rights. To take advantage of this exception, the business must also directly interact with its customers online.

AB 846 – Customer loyalty programs

Another bill that passed with amendments, AB 846, added a section to the CCPA that explicitly allows for

businesses to operate a customer loyalty programs even if a consumer opts-out of their personal information being

sold. The bill still provides that a business cannot sell the personal information of consumers collected pursuant to

a customer loyalty program.

Additionally, AB 874, which clarifies the “publicly available information” exception to the definition of personal

information, and AB 1355, which clarified some drafting errors, passed out of committee without change.

Amendments Failing in Committee

A number of closely watched bills proposed in the state legislature failed to pass muster and, at least for now,

have been tabled.

AB 873 would have narrowed the definition of “personal information” by removing information that is “capable

of being associated with” a particular consumer and information that could be linked to a particular “household.”

It also proposed to slightly modify the definition of de-identified data. While the bill failed to pass the Senate,

there will be a rehearing on this bill after the legislature reconvenes on August 12. The legislature will then have

until September 13 to pass this amendment. Thus, it remains to be seen what will happen with this particular

amendment.

AB 981 initially proposed to exempt insurance institutions, agents and other related organizations from the

CCPA. This amendment failed to secure approval from the Judiciary Committee and likely will not be renewed

before the end of this year’s legislative session.

California, however, has a two-year legislative calendar, with each year having its own timeline for bills to move

through the process. Any bills that do not pass both houses by the end of 2019 can be picked up and continued

through the legislative process in 2020 without needing to be reintroduced. Thus, while AB 981 is unlikely to

become part of the CCPA before it goes into effect in 2020, this bill could be revived next year.

The same is true for other amendments that have been effectively killed, including SB 561, which would have

dramatically expanded the private right of action to allow private suits with any violation of the CCPA. The bill,

which had the support of Attorney General Xavier Becerra, was blocked earlier this year, but because of the two-

year legislative session, it can be raised again next year.

What’s Next?

September 13, 2019 is the last day for each house to pass bills this year. At that point, Governor Gavin Newsom

will have until October 13, 2019, to sign or veto the approved bills. Bills signed by Governor Newsom will go

into effect with the CCPA on January 1, 2020.

Additionally, draft regulations from the Attorney General are expected in fall 2019. A public comment period and

additional public hearings will follow the publishing of the proposed text of the regulations.

We at Procopio will continue to closely monitor developments. In the meantime, given the short window until the

effective date of the CCPA, covered businesses should review their current procedures and be prepared with a

plan moving forward.

Elaine F. Harwell is a Senior Counsel in Procopio’s Privacy and Cybersecurity Practice

Group. She is an experienced business litigation attorney and a trained privacy

professional. Her practice is focused on representing clients in cybersecurity and data

privacy matters, including litigating claims involving privacy issues, helping clients manage

emerging risks and conduct privacy risk assessments, and advising on regulatory issues.

Elaine has also been involved in numerous trials as well as arbitration proceedings related to contract and

general business disputes, complex unfair competition and business practice claims, and professional liability.

She has earned the ANSI-accredited Certified Information Privacy Professional/United States (CIPP/US)

credential through the International Association of Privacy Professionals (IAPP).

California, State Developments, Unfair Competition and Trade Secrets

Labor Code Section ���: Answers to �� KeyQuestions About California’s New Limits onOut-of-State Choice of Law and ForumSelection Clauses

January 4, 2017

O n January �, ����, California Labor Code Section ��� went into e�ect. �is

new provision limits an employer’s abili� to require employees to enter

agreements that include out-of-state choice of law and/or forum selection clauses.

Below are �� questions about the new law and the answers every employer should

know.

�. To whom does the law apply? Generally, Section ��� applies to all employers

(regardless of where they are headquartered) entering employment

agreements with employees who primarily work and reside in California.

�. What are the law’s restrictions? An employer may not require an employee

(unrepresented by counsel) who primarily works and resides in California, as a

condition of employment, to agree to a provision requiring the employee to

adjudicate disputes arising in California in a forum outside of California or

under other than California law.

�. What if the employee is represented by counsel? Section ��� does not

apply to an agreement with an employee who is “in fact individually

represented” if his or her lawyer is involved in negotiating the terms of the

forum selection or choice of law clause applicable to employment disputes.

�. What if the employee works in California but resides outside of

California (or vice versa)? �e plain language of Section ��� makes clear that

the law applies to agreements with employees who primarily (meaning more

than half of the time) reside and work in California.

�. What if the agreement is voluntary? Section ��� prohibits requiring an

employee to enter an agreement with an out-of-state forum selection or

choice of law clause as a condition of employment. �e law would not apply to

a voluntary agreement that is not a condition of employment. For example, a

voluntary severance agreement is not entered into as a condition of

employment.

�. What if the dispute arises outside of California? �e plain language of

Section ��� makes clear that the law applies to claims or controversies arising

in California. Keep in mind, however, that absent a unique fact pa�ern,

employment claims by employees who primarily reside and work in California

are likely to be deemed to have arisen in California.

�. What if the dispute involves arbitration, rather than litigation? Section

��� applies to disputes arising in arbitration or litigation.

Danielle Ochs

San Francisco

Author

�. What are the consequences of violating the law? Any provision of an

agreement that violates the law is voidable by the employee. If an employee

requests that a provision be rendered void, the dispute over whether the

provision is voidable will be litigated in California under California law. A

court may issue a full range of relief in connection with the resolution of that

dispute, including injunctive relief and reasonable a�orneys’ fees. Additionally,

existing law prohibits an employer from requiring an employee or applicant

for employment to agree, in writing, to any term or condition that is known

by the employer to be illegal. An agreement found to be void under Section

��� may also violate California Labor Code Section ���.�, California Business

and Professions Code Section �����, and/or common law claims such as

violation of public policy.   

�. Does the law apply to existing agreements? �e law applies to agreements

entered into, modified, or extended on or a�er January �, ����. �e law does

not apply to existing agreements that remain unchanged.

��. What can employers do now? Employers with employees working and

residing in California may want to review all mandatory employment

agreements to determine whether they contain out-of-state forum selection or

choice of law clauses, including arbitration clauses, at-will agreements and

handbook acknowledgments, confidentiali� and nondisclosure agreements,

and invention and assignment agreements. For those agreements that will be

modified or extended and for all new agreements, employers may want to

consider removing out-of-state forum selection or choice of law clauses.

Alternatively, employers may consider adding an addendum to existing

mandatory agreements stating that employment disputes arising in California

with employees primarily working and residing in California will be resolved

in California under California law. For non-mandatory, individually

negotiated agreements, employers may want to consider advising employees

or applicants to obtain counsel. Where applicable, employers may want to

include a recital confirming the presence of counsel.

ERISAMusician did not suffer injury due to talent listingcompany’s alleged violation of bond procurementrequirements under Fee-Related Talent Services Law,when musician did not rely on company’s satisfaction ofrequirements before purchasing membership.Glazing Health &Welfare Fund v Lamek [9thCir] ..........................................................................132

Competitive Business Practices

Unfair CompetitionMusician did not suffer injury due to talent listingcompany’s alleged violation of bond procurementrequirements under Fee-Related Talent Services Law,when musician did not rely on company’s satisfaction ofrequirements before purchasing membership.Demeter v Taxi Computer Servs., Inc. [Cal App] ...132

Business Litigation

RemediesJudgment creditor, who seized judgment debtor’sbusiness during pendency of appeal, could not recoverrestitution for losses incurred while operating seizedcompany before reversal.PSM Holding Corp. v National Farm Fin. Corp.[9th Cir] ..................................................................132

General Business

Insurance“Valuable possessions” property insurance policy did notcover losses stemming from insured’s purchase ofcounterfeit wine.Doyle v Fireman’s Fund Ins. Co. [Cal App] ...........133

RetailPetition signature-gathering activity on grocery stores’private premises did not constitute protected activity foranti-SLAPP purposes.Ralphs Grocery Co. v Victory Consultants, Inc.[Cal App] ................................................................133

Federal Securities

Securities FraudAllegations of financial mismanagement wereinsufficient to support strong inference of scienter, ratherthan honest mistake.Webb v SolarCity Corp. [9th Cir] ...........................133

FEATURED ARTICLES

The Slow But Almost Certain

Demise of Nonsolicitation of

Employees Covenants Under

California Law (Part 2)

Tyler M. Paetkau

Post-Edwards Case Law Considering the

Enforceability of Postemployment Nonsolicitation of

Employees Provisions

Although there is no published precedential decision yet,several courts have considered the enforceability ofemployee nonsolicitation provisions after the SupremeCourt’s 2008 decision in Edwards v Arthur Andersen (2008)44 C4th 937, rejecting the common law “rule of reasonable-ness.” The emerging trend has been to find that they unlaw-fully restrain competition and are void on their face in viola-tion of Bus & P C §16600.

Then Northern District of California Chief Judge MarilynPatel considered the enforceability of four types of postem-ployment nonsolicitation covenants in Thomas Weisel Part-ners LLC v BNP Paribas (ND Cal, Feb. 10, 2010, No. C07–6198 MHP) 2010 WL 546497 at *3:

One type of provision is a classic covenant not to com-pete between an employer and an employee in which theemployee agrees not to work for competitors for a certainamount of time after termination of the employment. Thesecovenants are, with narrow exceptions, unlawful under sec-tion 16600. A second type of provision is one forbidding thesolicitation of the employer’s customers by the employee fora certain period of time after the termination of employment.Such a clause may also run afoul of section 16600 if itrestrains the employee’s ability to engage in her profession.A third sort of agreement is a “no hire” provision between abusiness and its customer. A business that provides the ser-vices of its employees directly to a customer may seek todeter the customer from hiring the employees away. In usingthe third type of agreement, the employer, instead ofattempting to bind an employee with a covenant not to com-pete, attempts to obligate customers not to hire its employ-ees. California law equates this type of “no hire” provisionwith a covenant not to compete because, like a covenant notto compete, such a provision restricts the ability of theemployees in question to engage in their profession.A fourthtype of provision restricts an employee or former employeefrom soliciting the employer’s other employees, i.e.,approaching them for the purpose of encouraging them toleave their present employer for a competitor. (Citationsomitted.)

Judge Patel first noted that “[u]nder California precedent,restrictions on the solicitation of employees are not necessar-ily treated in the same way as restrictions on the solicitation

116 May 2018 39 California Business Law Reporter

of customers,” citing Loral Corp. v Moyes (1985) 174 CA3d268, which “appears to have construed the prohibition on‘raiding’ to proscribe the solicitation of employees.” 2010WL 546497 at *4. Judge Patel distinguished Edwards,which“articulates the broad principles and policy considerationsbehind section 16600; however, the facts of that case did notinvolve a ‘no hire’ or even a ‘no solicitation’ clause pertain-ing to the company’s employees.” 2010 WL 546497 at *5(citing Edwards, 44 C4th at 948). Moreover, Judge Patelnoted, “[t]he challenged provisions included, rather, aneighteen-month covenant not to compete and a provisionprecluding the solicitation of the company’s customers for aperiod of one year,” both of which the Supreme Court heldvoid. 2010 WL 546497 at *5.

“Although not controlling,” Judge Patel found VL Sys.,Inc. v Unisen, Inc. (2007) 152 CA4th 708 instructive: “Asnoted, the [VL Systems] court equated [a no-hire] agreementwith a covenant not to compete because the agreementrestricted the opportunities of the company’s employees.Moreover, the agreement did so without the employees’knowledge or consent since the employees were not partiesto it.” 2010 WL 546497 at *5. (The agreement in questionwas betweenVL Systems and one of its clients, in which theclient agreed not to hire any VL Systems employee for aperiod of 1 year after the contracted work was concluded.)The VL Systems court noted, however, that “[t]he facts of thiscase sharply contrast with the situations in which such con-tractual provisions have been upheld, including Loral.” 152CA4th at 715. Among those differences were the following:

• The client did not solicit the employee’s application forthe position; it posted the job opening on an Internet site,and the employee responded to the posting;

• The employee chose to apply independently of any con-nection between VL Systems and the client; and

• The employee worked for VL Systems for only a shorttime, and he did no work at all for the client while he wasemployed.

In short, according to the VL Systems court, “[t]his is nota case where the happy client of a consulting firm attempts topoach an employee. [The employee], like any other appli-cant, chose to seek the job with [the client].” The VL Systemscourt focused on the effect of the no-hire provision in reject-ing VL Systems’ form-over-substance attempt to distinguishthe no-hire provision from more traditional covenants not tocompete (152 CA4th at 715):

While [VL Systems] claims that enforcing [the no-hireprovision] would not have limited [the client’s] ability to hire[the employee] or his mobility, logic and common sense tellsus otherwise. If [the client] had known at the time that ithired [the employee] that it either had to pay $60,000 or facea lawsuit, would it have hired [the employee] over anotherapplicant? The answer strikes us as obvious, and just as obvi-ously, upholding such a contractual provision would unfairlynarrow the mobility of an employee who had never workedfor [the client] as a [VL Systems] employee and had inde-

pendently sought out [the client’s] job opportunity. Thus,contrary to [VL System’s] arguments, we find that enforcingthis clause would present many of the same problems as cov-enants not to compete and unfairly limit the mobility of anemployee who actively sought an opportunity with [the cli-ent].

The plaintiff in ThomasWeisel Partners relied principallyon Loral. Judge Patel ruled that the covenant was void to theextent that it amounted to a “no-hire” restriction, observing(2010 WL 546497 at *5):

Thus, even though the court cited with approval a Geor-gia case, Lane Co. v Taylor [citation], which the courtdescribed as upholding a restriction on “hiring,” [citation],the Loral court appears to have considered the “no raiding”clause to be equivalent to a “no solicitation” clause ratherthan a “no hire” clause. As [defendant] Chakravarty pointsout, the case does not squarely hold that a “no hire” clausebetween a company and its employee is permissible.

Reading Loral together with VL Systems, and consideringthe underlying policy concerns of section 16600 as articu-lated in the California Supreme Court’s recent Edwards caseand other cases, this court concludes that California courtswould hold the provision at issue in this case unenforceableto the extent that it attempts to restrain a person from hiringhis former colleagues after the cessation of his employmentwith their employer.An employer has a strong and legitimateinterest in keeping current employees from raiding theemployer’s other employees for the benefit of an outsideentity. Such a restriction “only slightly affects [ThomasWei-sel Partners (TWP)] employees,” who were not hamperedfrom seeking employment with BNP Paribas Asia of theirown accord before Chakravarty joined BNP Paribas Asia.[Citation.] When, however, an employee has already madethe transition from one employer to another, the same inter-ests at issue in VL Systems are at play, particularly if theemployee in question is a manager with hiring responsibili-ties. If the “no hire” provision were enforceable as toChakravarty after he left TWP’s employ and began runningBNP Paribas Asia’s operation, BNP Paribas Asia wouldlikely consider itself restrained from hiring any former TWPemployees for a year. This would restrain the mobility ofcurrent TWP employees as they would be precluded fromobtaining a position with BNP ParibasAsia because Chakra-varty would be the person hiring them. A former employee“no hire” agreement would serve to restrain mobility inmuch the same way as a covenant not to compete, albeit per-haps less directly than a customer “no hire” provision.Accordingly, the Agreement is void under section 16600 tothe extent that it purports to prohibit Chakravarty from hiringTWP employees following Chakravarty’s transition fromTWP to another company.

Judge Patel ruled, however, that the employee nonsolici-tation provision was enforceable under Loral, and alsorejected the defendant former employee’s argument that thecourt should invalidate the entire agreement rather than sev-ering the unenforceable employee “no hire” provision. 2010WL 546497 at *6.

39 California Business Law Reporter May 2018 117

On the other side of the debate over whether Edwardseffectively abrogated or overruled Loral regarding theenforceability of nonsolicitation of employees provisions,U.S. District Judge Lucy Koh invalidated a similar nonso-licitation of employees provision in SriCom, Inc. v eBis-Logic, Inc. (ND Cal, Sept. 13, 2012, No. 12-CV-00904-LHK) 2012 WL 4051222:

As Defendants point out, nonsolicitation and no-hireagreements are generally void under this provision. [Cita-tions.] In its recent decision in Edwards [citation], the Cali-fornia Supreme Court confirmed the continued viability andbreadth of Section 16600. The Court explained that byenacting Section 16600, the California legislature intendedto further “a settled legislative policy in favor of open com-petition and employee mobility.” Thus, Section 16600 is abroad prohibition on “every contract by which anyone isrestrained from engaging in a lawful profession, trade, orbusiness of any kind.” [Bus & P C §16600].

This broad prohibition has, however, been occasionallysubjected to specific exceptions. In particular, SriCom relieson [Webb v West Side Dist. Hosp. (1983) 144 CA3d 946], inwhich the Court held that an agreement requiring a hospitalto pay an additional fee if it directly hired any doctors origi-nally placed there by a staffing agent was not void underSection 16600. In Webb, the Court noted that the staffingagent’s “economic interest was … valuable and protectable:without recoupment of the recruitment expenses he hadincurred, [the consultant] became vulnerable to unfairexploitation of his labors.” [Citation.] SriCom argues thatWebb created an exception to Section 16600 where staffingagencies are involved.

Defendants rely on Edwards for the proposition that evenif that were once a generally applicable exception, now,“[n]oncompetition agreements are invalid under section16600 in California even if narrowly drawn, unless they fallwithin the applicable statutory exceptions.” Since the Webbexception was judicially created, Defendants argue, it cannotcontinue to exist post-Edwards. [Citation.] The contract termat issue here, however, is not a noncompetition agreementlike that discussed in Edwards, but rather a nonsolicitationand no-hire provision. [2012 WL 4051222 at *4, citingThomas Weisel Partners LLC v BNP Paribas, supra, whichdistinguished among five separate types of provisions poten-tially implicating Bus & P C §16600).] The plain languageof Edwards, then, does not necessarily eliminate the excep-tion recognized in Webb.

The reasoning in Edwards, however, forecloses contin-ued reliance onWebb. Specifically, Edwards rejects the con-tention that Section 16600 “embrace[s] the rule of reason-ableness in evaluating competitive restraints.” [2012 WL4051222 at *5, quoting Edwards, 44 C4th at 947.] Webb ispremised on the notion that restraints on direct hiring in thestaffing agent context were unreasonable when weighed “bybalancing, in the light of all the circumstances, the respectiveimportance to society and the parties of protecting the activi-ties interfered with on the one hand and permitting the inter-ference on the other.” [2012 WL 4051222 at *5, quotingWebb, 144 CA3d at 951.]Without the rule of reasonableness,Webb cannot stand.

Thus, the question here is whether, under the literal termsof the statute, “anyone is restrained from engaging in a law-ful profession, trade, or business of any kind.” [Bus & P C§16600.] The contract at issue here unequivocally purportsto restrain the consultants SriCom had placed with eBis-Logic from working directly for eBisLogic. Accordingly,Section 16600 voids the provision.

In Tivoli LLC v Targetti Sankey S. P. A. (CD Cal, Feb. 3,2015, No. SA CV 14–1285-DOC (JCGx)) 2015 WL12683801, a sale of business case, the defendant sellerargued that customer and employee nonsolicitation provi-sions were invalid under California law. The plaintiff buyersargued that the nonsolicitation agreement fell within the saleof “goodwill” exception of Section 16601. The “Covenant ofNonsolicitation” attached to the purchase agreement pro-vided that Targetti Poulsen would not “solicit any person”who at the time was employed by Tivoli to leave Tivoli, or tobecome employed by any other entity engaged in competi-tion with Tivoli. The plaintiffs contended that “this covenantis valid as part of the bargained-for consideration receivedupon Targetti Poulsen’s sale of its shares of Tivoli—and thatthe restriction validly prevents the reduction of the value ofthe property acquired by Neo-Neon USA and AmericanLighting.” U.S. District Judge David O. Carter framed theissue as “whether a nonsolicitation clause which restrainsthe selling party (Poulsen) from later offering employmentto the buyer’s (Tivoli) employees is void under Section16600 and not within the exception provided by Section16601.” 2015 WL 12683801 at *6.

Judge Carter first observed that “California’s court[s]have not squarely addressed this question. Indeed, there is adearth of case law addressing so-called ‘anti-raiding’clauses, especially in the context of Section 16601.” 2015WL 12683801 at *6. Judge Carter then analyzed and quotedEdwards’ explicit rejection of the common law “rule of rea-sonableness:” “Fairly read, the foregoing authorities suggestsection 16600 embodies the original, strict common lawantipathy toward restraints of trade, while the section 16601and 16602 exceptions incorporated the later common law‘rule of reasonableness’ in instances where those exceptionsapply.” 2015WL 12683801 at *6, quoting Edwards, 44 C4that 948. Judge Carter recognized that “Edwards does drawinto question previous authority on the issue of employeenonsolicitation provisions.” Judge Carter observed that“[i]n reaching its determination, the [Loral] court noted that‘[t]he potential impact on trade must be considered beforeinvalidating a noninterference agreement,’” and that “[s]ucha reasonableness assessment may be vulnerable underthe holding in Edwards.” 2015 WL 12683801 at *6, citingand quoting Loral, 174 CA3d at 278 (emphasis added); alsociting as “but see” Sunbelt Rentals, Inc. v Victor (ND Cal,Feb. 5, 2014, No. C 13–4240 SBA) 2014 WL 492364 (find-ing provision prohibiting former employee from recruitingcompany’s employees was not void under section 16600)and Arthur J. Gallagher & Co. v Lang (ND Cal, May, 23,2014, No. C 14–0909 CW) 2014 WL 2195062 (same).

118 May 2018 39 California Business Law Reporter

Judge Carter found the nonsolicitation of employees pro-vision enforceable, however, under the “sale of business”exception to §16600, Bus & P C §16601 (2015 WL12683801 at *7, citing Loral, 174 CA3d at 279):

Regardless, the facts and reasoning in Loral are still ofassistance to this Court. Loral involved a termination agree-ment that prohibited the terminated employee from solicit-ing employees of his former company. As to the impact onthe company’s employees, rather than the terminated party,the court found:

This restriction only slightly affects [the current] employ-ees. They are not hampered from seeking employment with[the subsequent employer] nor from contacting [the termi-nated employee]. All they lose is the option of being con-tacted by him first.… Equity will not enjoin a formeremployee from receiving and considering applications fromemployees of his former employer, even though the circum-stances be such that he should be enjoined from solicitingtheir applications.

As to the goals of the provision, the [Loral] court noted,“The restriction presumably was sought by plaintiffs in orderto maintain a stable work force and enable the employer toremain in business,” and “[a]lthough not considering theexception, these goals are entirely consistent with the under-lying purposes of Section 16601.”

Judge Carter observed that only one California case(Strategix, Ltd. v Infocrossing W., Inc. (2006) 142 CA4th1068, 1073) appears to discuss nonraiding provisions at theintersection with Section 16601. He found that “[a]lthoughthe case predates [Edwards v Arthur Andersen (2008) 44C4th 937], Edwards does not undermine the court’s analysis,as Edwards did not consider nonsolicitation agreements inthe context of Section 16601.” 2015 WL 12683801 at *7.Thus, Tivoli held that “the nonsolicitation clause in the pur-chase agreement falls within the exception of Section16601”:

Under California law, Section 16601 encompasses agree-ments whereby the seller is restricted from soliciting thecompany’s employees. As written, Targetti Poulsen isrestrained from pursuing Tivoli’s employees, thereby erod-ing the goodwill that Plaintiffs paid for in their acquisition ofthe remaining shares of Tivoli. [¶] Significantly, Tivoli’semployees are not restrained from working for Targetti or itsaffiliates, so long as the employees are not solicited byDefendants. They are free to seek out employment with Tar-getti Poulsen or its affiliates. The restriction imposed onnon-signatories to the agreement is de minimis, and does notinterfere with California’s strong public policy favoringopen competition.

2015 WL 12683801 at *7, citing Loral, 174 CA3d at 279(“This restriction only slightly affects [the current] employ-ees”), and Thomas Weisel Partners LLC v BNP Paribas (NDCal, Feb. 10, 2010, No. C 07–6198 MHP) 2010 WL 546497at *5 (distinguishing no-hire provisions from nonsolicitationprovisions).

In Arthur J. Gallagher & Co. v Lang (ND Cal, May 23,2014, No. C 14–0909 CW) 2014 WL 2195062, the employ-ment agreement contained various noncompetition and non-solicitation provisions governing the former employee-defendant Lang’s relationships with Gallagher’s clients andemployees for up to 2 years after he ceased working for thefirm. One of these provisions precluded Lang from solicitingany “insurance related business with any individual, partner-ship, corporation, association or other entity or ProspectiveAccount about which [he] received trade secrets of [Gal-lagher] or any of its affiliates.” Another provision stated thatLang would not “directly solicit, induce or recruit anyemployee of [Gallagher] or its affiliates to leave the employof [Gallagher] or its affiliates.”

In its complaint, the former employer, Gallagher, allegedthat Lang breached the employment agreement by, amongother things, soliciting its clients and employees; failing toprovide written notice of his resignation 60 days before leav-ing the firm; refusing to meet with the firm’s legal counselafter leaving the firm; and failing to return certain materialsto the firm, as required by the agreement. Lang contendedthat the noncompetition and nonsolicitation provisions werevoid as a matter of California public policy, citing Bus & PC §16600. Gallagher contended that §16600 did not applybecause the agreement contained an Illinois choice-of-lawprovision.

U.S. District Judge ClaudiaWilken first found the Illinoischoice-of-law provision unenforceable: “Applying Illinoislaw to the parties’ contract would contravene California’sfundamental public policy against the enforcement of non-competition and non-solicitation agreements.” 2014 WL2195062 at *3. Judge Wilken next ruled that “[u]nder Cali-fornia law, to the extent that the provisions of the agreementpreclude Lang from soliciting business from Gallagher’s cli-ents, they are void.” 2014 WL 2195062 at *4, citingEdwards, 44 C4th at 948. Relying exclusively on Loral andThomas Weisel Partners, however, Judge Wilkin ruled thatthe nonsolicitation of employees provision was enforceableunder California law:

Although California courts recognize that an employermay not prohibit its former employees from hiring theemployer’s current employees, an employer may lawfullyprohibit its former employees from actively recruiting orsoliciting its current employees. See [Loral Corp. v Moyes(1985) 174 CA3d 268, 280] (“Equity will not enjoin a for-mer employee from receiving and considering applicationsfrom employees of his former employer, even though the cir-cumstances be such that he should be enjoined from solicit-ing their applications.”); [Thomas Weisel Partners LLC vBNP Paribas (ND Cal, Feb. 10, 2010, No. C 07–6198 MHP)2010WL 546497 at *6] (recognizing that section 16600 pre-cludes restraints on hiring former colleagues but permitsrestraints on solicitation).

In Sunbelt Rentals, Inc. v Santiago Victor (ND Cal, Feb. 5,2014, No. C 13–4240 SBA) 2014 WL 492364, JudgeWilken, again relying exclusively on Loral, rejected the

39 California Business Law Reporter May 2018 119

defendant-former employee’s argument that the nonsolicita-tion of employees provision in his employment agreementviolated §16600 (although, on the facts, she found that thedefendant had not breached it and denied the plaintiff-formeremployer’s motion for preliminary injunctive relief) (2014WL 492364 at *8, citing Loral, 174 CA3d at 281):

Victor also challenges the restriction against solicitingSunbelt employees for employment. Section 5.2(i) of theAgreement provides that: “Employee shall not directly orindirectly … solicit the employment of … any person who atany time during the twelve (12) calendar months immedi-ately preceding the termination or expiration of this Agree-ment was employed by [Sunbelt].” A contractual provisionpreventing a departing employee from “raiding” his formeremployer’s employees is “not void on its face under Busi-ness and Professions Code section 16600.” Loral [citation].Victor argues that Loral is distinguishable on the ground thatthere is no evidence that he actually lured any Sunbeltemployees to seek employment with Ahern. However,whether there is evidence that Victor solicited Sunbeltemployees is a separate and distinct issue from whether theAgreement’s restriction on soliciting Sunbelt’s [employees]for employment violates section 16600. Thus, based on thearguments presented thus far, the Court is not persuaded byVictor’s contention that the non-solicitation clause is invalid.The Court therefore addresses whether there is compellingevidence that Victor breached this non-solicitation provi-sion.

In Cap Gemini Am., Inc. v Judd (Ind Ct App 1992) 597NE2d 1272, an Indiana Court ofAppeal, applying Californialaw pre-Edwards, held that a nonsolicitation of employeesprovision was overbroad and unenforceable, even underLoral. The trial court determined that the nonsolicitation ofemployees for 1 year after termination was invalid. The non-solicitation clause in Judd’s employment agreement stated:“Employee agrees that he will not … aid or endeavor tosolicit or induce then remaining employees of [CGA] … toleave their employment with [CGA] … in order to acceptemployment with another person, firm or corporation[.]” Ininvalidating the nonsolicitation of employees provision, theCap Gemini court distinguished Loral (597 NE2d at 1287):

We find the facts of this case to be distinguishable fromLoral and conclude that the nonsolicitation clause was anunreasonable restriction on business. CGA attempted to pre-vent Judd from hiring CGA employees regardless of theirlocation. Judd had primarily worked in California for CGA,but the nonsolicitation covenant was not limited to CGAemployees in California. It was unreasonable to extend theprotection of maintaining a stable work force to CGA’sbranch in Indianapolis when Judd was based in California.Therefore, we agree with the trial court that the nonsolicita-tion covenant was invalid.

In Atmel Corp. v Vitesse Semiconductor Corp. (Colo CtApp 2001) 30 P3d 789, a former employer sued its formeremployees and their new employer to enforce nonsolicita-tion clauses in the former employees’ employment agree-

ments. The nonsolicitation of employees covenant stated:“Solicitation of Employees. I agree that I shall not for aperiod of one year following the termination of my relation-ship with the Company … either directly or indirectly …solicit, recruit or attempt to persuade any person to terminatesuch person’s employment with the Company.” 30 P3d at793. The trial court issued an injunction prohibiting the for-mer employees from having any involvement, direct or indi-rect, in their new employer’s hiring process. The ColoradoCourt of Appeal reversed, opining that “if the non-solicitation clauses were interpreted as broadly as the pre-liminary injunction provides, they would be void as violativeof the Colorado and California statutes that prohibit agree-ments in restraint of trade.” 30 P3d at 794. Based onLoral, the Atmel court ruled that “the non-solicitation clauseis void and unenforceable to the extent it can be interpretedto prohibit those defendants from doing anything other thaninitiating contacts with Atmel’s employees.” 30 P3d at 794.

In Sonic Auto., Inc. v Younis (CD Cal, May 6, 2015, No.15–CV–00717 RGK (AGRx)) 2015 WL 13344624, therestrictive covenant in the defendant-former employee’semployment agreement stated that he could not “[s]olicit,hire, offer to hire, employ, engage, or knowingly permit orcause any company or business directly or indirectly con-trolled by [the defendant-former employee] … to solicit,hire, offer to hire, or employ any person who is or wasemployed by [the plaintiff-former employer].” The courtonce again relied heavily on Loral and Thomas Weisel Part-ners:

The Court finds that to the extent the provision purportsto restrict Defendant from hiring Plaintiff’s employees, theprovision is unenforceable. [¶] However, unlike the no-hirerestriction, the no-solicitation aspect of the provision is validand enforceable. The Court finds no authority to the con-trary. Indeed, in Loral, the court found that a noninterferenceagreement not to solicit former co-workers to leave theemployer was considered a no-solicitation agreement, whichwas valid. Loral [citation]. Further, in Thomas Weisel Part-ners LLC, the court found a no-hire provision unenforceableonly to the extent that it restricted hiring, not soliciting.ThomasWeisel Partners LLC [citation]. Therefore, the Courtrejects Defendant’s argument and finds that the restrictivecovenant is valid to the extent it prohibits no-solicitation ofPlaintiff’s employees.

Conclusion

As U.S. District Judge Lucy Koh determined in SriCom,Inc. v eBisLogic, Inc., the reasoning in Edwards foreclosescontinued reliance on Webb (and Loral). Specifically,Edwards rejects the contention that Bus & P C §16600“embrace[s] the rule of reasonableness in evaluating com-petitive restraints.” Webb is “premised on the notion thatrestraints on direct hiring in the staffing agent context wereunreasonable when weighed ‘by balancing, in the light of allthe circumstances, the respective importance to society andthe parties of protecting the activities interfered with on theone hand and permitting the interference on the other.’”

120 May 2018 39 California Business Law Reporter

Similarly, Loral is premised on the rejected common law“reasonableness” analysis.Without the common law “rule ofreasonableness,” neither Loral norWebb remain good law inCalifornia. Under the literal terms of §16600, an agreementis “to that extent void” if “anyone is restrained from engag-ing in a lawful profession, trade, or business of any kind.”The typical, broad nonsolicitation of employees covenantunequivocally restrains former employees from solicitingtheir former colleagues, whom they may know very well.Moreover, there is no logical or principled reason whypostemployment nonsolicitation of customers contractualrestraints should be treated differently from broad nonsolici-tation of employees contractual restraints.And, just like non-solicitation of customers covenants, there is no statutoryexception for nonsolicitation of employees covenants.Accordingly, §16600 voids these postemployment contractrestraints.

The contrary conclusions of a few post-Edwards courtscannot withstand scrutiny. Indeed, such opinions appear toendorse a type of “narrow restraint” exception to §16000that the Supreme Court of California expressly rejected inEdwards, warning courts not to create such nonstatutoryexceptions by “judicial fiat.” For example, even in Loralitself, the court both endorsed the now-rejected “narrowrestraint” theory and suggested that nonsolicitation of cus-tomers provisions were lawful: “This does not appear to beany more of a significant restraint on his engaging in his pro-fession, trade or business than a restraint on solicitation ofcustomers or on disclosure of confidential information.”Loral, 174 CA4th at 278.After Edwards, Loral cannot stand.

DEVELOPMENTS

Partnerships

Fiduciary Duty

Trial court properly allowed amendment of answer dur-ing trial to assert subsequent incorporation as defenseto existence of partnership.

Eng v Brown (2018) 21 CA5th 675In 2006, Eng, Levy, and Brown agreed to purchase a res-

taurant, with Brown to own 57 percent, Levy to own 33 per-cent, and Eng to own 10 percent. In 2007, the group pur-chased the restaurant under the name BLE Fish, Inc., whichhad been incorporated on the day the purchase offer wasmade. From 2007 to 2010, Eng received approximately$160,000 in distributions from BLE Fish. In 2010, Brownand Levy began to manage the business on a full-time basis,took salaries as corporate officers, and retained a manage-ment company they controlled to oversee the restaurant’soperations. BLE Fish agreed to pay the management com-pany a percentage of gross sales in exchange for its services.Based in part on these expenses, Eng received no distribu-

tions in 2011. Eng then sued Brown, Levy, and BLE Fish,asserting claims for dissolution of their partnership and anaccounting, constructive fraud, and conversion based onbreach of fiduciary duty.

During the proceedings, Eng brought a motion in limineto exclude any evidence or argument that a partnership wasnot formed to purchase the restaurant or that BLE Fish hadsuperseded the partnership. The trial court denied themotion. After Eng moved for a directed verdict on the issueof subsequent incorporation as a defense to the existence ofa partnership, the trial court permitted Brown and Levy toamend their answer to include the affirmative defense ofsupersession. The court reasoned that such an amendmentwould not cause prejudice, because Eng had notice of thedefense and relevant facts had been included in the evidence.The jury found that the parties formed a partnership or jointventure, but had terminated that partnership or joint ventureby forming BLE Fish. The trial court entered judgment forBrown and Levy.

The court of appeal affirmed, finding that the trial courtproperly allowed amendment of the answer to assert super-session. Under CCP §576, the trial court may allow theamendment of any pleading, in the furtherance of justice, atany time before or after commencement of trial. Here,Brown and Levy’s position throughout the litigation was thatno partnership had been formed and, alternatively, that anypartnership had been superseded by the incorporation ofBLE Fish. Thus, Eng had ample notice of the defenses andwould not be unfairly prejudiced by the amendment.

The court of appeal also upheld the trial court’s denial ofEng’s motion for a directed verdict on the supersessiondefense. A directed verdict may only be granted when thecourt determines there is no evidence sufficient to supportthe claim or defense of the nonmoving party. Moore v Mer-cer (2016) 4 CA5th 424. Here, Brown and Levy producedevidence that any partnership formed between the partieswas superseded by the formation of BLE Fish. In response,Eng asserted that the partnership survived the formation ofBLE Fish based on a preincorporation contract.Accordingly,there were material questions of fact on the issue of super-session. Thus, the trial court properly denied Eng’s motionfor directed verdict in order for the jury to decide the issue.

Contracts

Breach of Contract

Licensing agreement for manufacture and sale of moviecar replicas was supported by adequate consideration,despite pending litigation over registered trademarkrights.

Eleanor Licensing LLC v Classic Recreations LLC (2018) 21CA5th 599

H.B. Halicki wrote, directed, produced, and starred in the1974 filmGone in 60 Seconds,which featured a yellow 1971

39 California Business Law Reporter May 2018 121

California BUSINESS LAW REPORTER November 2017

Volume 39 Number 3

The Stow But Almost Certain Demise of Nonsolicitation of Employees Covenants Under California Law Tyler M. Paetkau

Tyler M. Paetkau

Since the decision in Loral Corp. v Moyes, many have assumed that a postemployment contract provision prohibiting a former employee from soliciting (or "raiding") his or her former colleagues is enforceable under California law. But a closer examination of Loral and more recent case law suggests that this assumption is dubious at best.

» See article on Page 44

Our Picks for Top Recent Business Law Cases We do the work for you: Here are the significant recent business law cases, with expert commentary on the most important ones.

I A San Francisco ordinance mandating a health warning on advertising for sugar-sweetened beverages was held to violate the First Amendment. American Beverage Ass'n v City & County of San Francisco . . ..... · ..... Page 57

I In a lawsuit in the wake of a fatal car accident, the victim's survivors argued an employer should be held liable because one of its supervisors had ordered himself to perform a special errand for the employer that resulted, unfortunately, in the accident. The court declined to expand the "special errand" exception to cases in which the employer had not requested the errand. Morales-Simental v Genentech, Inc . . .. ... ...... .. ... . .. ............. . ... Page 54

I A nonexclusive license does not constitute a "transfer of copyright ownership" and therefore cannot confer standing to assert an infringement claim. ORK Photo v Mcgraw-Hill Global Educ. Holdings, LLC . ................. Page 51

I Is a social media platform liable for the actions of volunteers who posted potentially copyright-infringing photos? The law of agency will decide. Mavrix Photographs, LLC v LiveJournal, Inc . . ... .... . ... . ...... .. . . .. . .. Page 53

Afraid of missing something? Follow CEB on Twitter (@ceb_ca) for all CA, 9th Cir, and Supreme Court cases with squibs and links daily.

» See more inside: Table of Contents LEGISLATIVE ROUNDUP

C£B® ceb.com

As we do every November, this issue high­lights in brief the new laws of interest to busi­ness law practitioners.

» See Page 47

CONTINUING EDUCATION OF THE BAR • CALI FORNIA © 2017 by The Regents of the University of California

44 November 2017 39 California Business Law Reporter

The Slow But Almost Certain Demise of Nonsolicitation of Employees Covenants Under

California Law

Tyler M. Paetkau

Introduction

Many have naturally assumed since the California Court of Appeal's decision over 3 decades ago in Loral Corp. v Moyes (1985) 174 CA3d 268 that a postemployment con­

tract provision prohibiting a former employee from solicit­ing (or "raiding") his or her former colleagues is enforceable under California law. But a closer examination of Loral, and more recent case Jaw, including the California Supreme Court's last decision interpreting Bus & P C § 16600, Edwards v Arthur Andersen (2008) 44 C4th 937, demon­strates that this principle is dubious at best. Edwards squarely rejected the common law "rule of reasonableness," on which Loral based its decision upholding a " non­interference/anti-raiding" contract provision. Further, the

challenged contract restriction in Loral prohibited a former employee's " interference" with and "disruption" of both customer and employment relationships, but did not literally prohibit solicitation of the former employer's employees. Nonsolicitation of employees provisions, like "no-hire" con­tractual restraints, by definition inhibit employee mobility and betterment. Such postemployment contractual restraints likely violate § 16600, which broadly declares "void" any contract provision that "restrain[s] [an individual] from engaging in a lawful profession, trade, or business of any kind.'' Indeed, there is no principled distinction between the nonsolicitation of customers provision invalidated in Edwards and the typical, broad nonsolicitation of employees provision. Both restrain competition; neither falls within any of the statutory exceptions to § 16600.

"Rule of Reasonableness" Rejected in Edwards

The postemployment noncompetition agreement in Edwards stated (44 C4th at 942; emphasis added):

If you leave the Firm, for eighteen months after release or resignation, you agree not to perl'orm professional services of the type you provided for any client [for] which you worked during the eighteen months prior to release or resig­nation. This does not prohibit you from accepting employ­ment with a client.

For twelve months after you leave the Firm, you agree not to solicit (tO perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation.

You agree not to solicit away from the Firm any of its pro­fessional personnel for eighteen months after release or res­ignation.

The California Supreme Court had ljttle difficulty con­cluding that the n.onsolicitation of customers provisions vio­lated § 16600, because it rejected the Ninth Circuit's so-called "narrow restraint" exception to § l 6600's broad prohibition of contractual restraints of trade. 44 C4th at 948. Importantly, however, the court noted that "[ w ]e do not here address the applicability of the so-called trade secret excep­tion to section 16600, as Edwards does not dispute that por­tion of his agreement or contend that the provision of the noncompetition agreement prohibiting him from recruiting Andersen's employees violated section 16600." 44 C4th at 946 n4.

The court contrasted the common law "rule of reason­ableness" with the plain and broad language of§ 16600 (44 C4th at 945):

Under the common law, as is still true in many states today, contractual restraints on the practice of a profession, business, or trade[] were considered valid, as long as they were reasonably imposed. This was true even in California. However, in 1872 California settled public policy in favor of open competition, and rejected the common law "rule of rea­sonableness," when the Legislature enacted the Civil Code. Today in California, covenants not to compete are void, sub­ject to several exception·s discussed brief! y below .. ..

In the years since its original enactment as [former] Civil Code section 1673, our courts have consistently affirmed that §16600 evinces a settled legislative policy in favor of open competition and employee mobility. The law protects Californians and ensures "that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice." It protects "the important legal right of persons to engage in businesses and occupations of their choosing."

After noting that it had previously invalidated an other­wise narrowly tailored agreement as an improper restraint under § 16600 because it required a former employee to for­feit his pension rights on commencing work for a competitor (see Muggill v Reuben H. Donnelley Corp. (1965) 62 C2d 239, 242), the supreme court stated: "In sum, following the Legislature, this court generally condemns noncompetition agreements." 44 C4th at 946. According to Edwards, "[u]nder the statute's plain meaning, therefore, an employer cannot by contract restrain a former employee from engag­ing in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule." 44 C4th at 947. (Presumably, the court was referencing the statutory exceptions (Bus & PC §§ 1660 I (owner-sellers of businesses), 16602 (partners), and 16602.5 (members of lim­ited liability companies)) to the general ban on postemploy­ment covenants not to compete.)

Undaunted, Arthur Andersen argued that the supreme court should interpret the term "restrain" under § 16600 to mean simply to "prohibit," so that only contracts that totally prohibit an employee from engaging in his or her profession,

(

39 California Business Law Reporter November 2017 45

trade, or business are illegal. It would then follow that a mere

limitation on an employee's ability to practice his or her vocation would be permissible under§ 16600, as Jong as it is reasonably based. But the California Legislature rejected Arthur Andersen's "reasonableness" argument when it

rejected the common law "rule of reasonableness" in 1872. The court concluded (44 C4th at 950):

Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. We reject Andersen 's contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.

Loral Corp. v Moyes Rests on the Now Rejected Common Law "Rule of Reasonableness"

Does the court of appeal's holding in Loral Corp. v Moyes, supra, survive the supreme court's rejection of the common Jaw "rule of reasonableness" in Edwards? A closer examination of Loral reveals that the answer is "probably not."

In Loral, the plaintiff, Loral Corporation, and its subsid­iary, Conic Corporation, sued its former executive officer, Robert Moyes, claiming Moyes breached his termination agreement by inducing employees of plaintiff to work for Moyes' subsequent employer, Aydin Corporation.

The primary question in Loral was the validity of the ter­mination agreement, which restrained Moyes from "disrupt­ing, damaging, impairing, or interfering with his former employer's business by ' raiding' its employees." 174 CA3d at 271. Strictly speaking, and importantly, the challenged contract provision in Loral was styled a "noninterference" or "anti-raiding" restriction, and not literally a nonsolicitation of employees covenant. The trial court granted the defendant-former employee's nonsuit motion after the plain­tiff's opening statement, on the ground that the restriction against hiring away the plaintiff's employees was an unlaw­ful restraint of competition, ruling that "the contract in its. entirety is null and void ab initio." 174 CA3d at 271.

The "noninterference" provision in the agreement stated (174 CA3d at 274):

As a condition for the foregoing paymentS, you will pre­serve the confidentiality of all trade secrets and other confi­dential information of Loral Corporation, Conic Corpora­tion, and its TerraCom Division, and you will not now or in the future disrupt, damage, impair or interfere with the busi­ness of Conic Corporation, or its TerraCom Division[,] whether by way of interfering with or raiding its employees, disrupting its relationships with customers, agents, represen­tatives or vendors or otherwise. You are not[,] however, restricted from being employed by or engaged in a compet­ing business.

After Moyes left Loral's employ, he became president of Aydin Corporation's microwave division. Loral's complaint

alleged that he then breached the agreemeflt by offering employment with his new employer to two key TerraCom employees, defendants Bruce Jennings and Larry Janssen. Janssen received a job offer from Moyes while he was employed as director of production at TerraCom, and he went to work for Aydin soon after Moyes became president. Jennings left his position as executive vice-president of Ter­raCom, and within a week was interviewed by Moyes at Aydin. Soon thereafter, Jennings became a marketing man­ager for Aydin. TerraCom investigated and determined that a large number of its key employees had interviewed with Moyes and been offered jobs at Aydin. Ultimately, a large number of people left TerraCom and it spent over $400,000 recruiting new employees. TerraCom's performance on a project to deliver a microwave radio was impaired by the departure of Moyes and other personnel.

The Loral court first noted that California courts had not addressed the application of § 16600 to a noninterference agreement such as the one at issue. The court found that it needed to consider the statute and the agreement in relation­ship to the tort Jaw of the marketplace, which would other­wise regulate defendant Moyes' conduct. The court next observed that "[g]enerally the Jaw of unfair competition pro­hibits former employees from disclosing or misusing an employer's trade secrets and confidential information-even in the absence of contractual restrictions," and that "the mis­use of trade secrets may include solicitation of an employer's customers when confidential information is employed." 174 CA3d at 275. .

The court then noted that "when permissible solicitation of an employer's customers is at issue, a contract may pro­hibit more than the law of the marketplace otherwise would .. .. Thus, contractual restrictions may have more impact in a nonsolicitation case than a nondisclosure case." 174 CA3d at 275. The court then equated the "noninterfer­ence" provision at issue to a nonsolicitation of customers provision, which older, pre-Edwards cases had upheld, par­ticularly in "trade route" cases. The court framed the legal issue as follows (174 CA3d at 275; emphasis added):

The impact of Business and Professions Code sect.ion 16600 on nondisclosure, nonsolicitation and noncom petition promises has already been determined. The basic rule in this state is th&t contracts precluding a fonner employee from obtaining new employment with a competitor are invalid under section 16600. "This section invalidates provisions in employment contracts prohibiting an employee from work­ing for a competitor after completion of his employment or imposing a penalty if he does so, unless they are necessary to protect the employer's trade secrets" [quoting Muggifl v Reuben H. Do1111elley Corp. (1965) 62 C2d 239, 242). As Muggill indicates, reasonably limited restrictions which tend more to promote than restrain trade and business do not vio­late the statute. Section 16600 does not invalidate an employee's agreement not to disclose his former employer's confidential customer lists or other trade secrets or not to solicit those customers. Thus, the statute invalidates an agreement penalizing a former employee for obtaining

46 November 2017 39 California Business Law Reporter

employment with a competitor, but does not necessarily affect an agreement delimiting how he can compete. Our question then is whether a noninteiference agreement not to solicit former co-workers to leave the emp!.oyer is more Like a 11oncompetition agreement which is invalid, or a nondis­closure or 11011solicitation agreement which may be valid.

The Loral court acknowledged Moyes' argument that there is nothing generally illegal about a competitor solicit­ing another's employees not under contract. (Since Loral, the California Supreme Court confirmed chat interference with at-will employment relationships is not actionable unless it is accompanied by some "independent wrongful acts." Reeves v Hanlon (2004) 33 C4th 1140, 1145.) The court also noted (citing several cases) that the law of unfair competition has struggled with the recurrent problem of when solicitation of anothe r's employees gives rise to tort liability. In this regard, it quoted Restatement (Second) of Agency §393, Comment e ( 1957) ( 174 CA3d at 276):

The limits of proper conduct with reference to securing the services of fellow employees are not well marked. An employee is subject to liability if, before or after leaving the employment, he causes fellow employees to break their con­tracts with the employer. On the other hand, it is normally permissible for employees of a firm, or for some of its part­ners, to agree among themselves, while still employed, that they will engage in competition with the firm at the end of the period specified in their employment contracts. How­ever, a court may lind that it is a breach of duty for a number of the key officers or employees to agree to leave their employment simultaneously and without givi ng the employer an opportunity to hire and train replacements.

The Loral court noted, however, that none of the cited authorities involved an agreement not to interfere with for­mer coworkers.

Given the paucity of California law on the issue, the Loral court considered two Georgia decisions-notwilhstanding the fact that Georgia had no law similar to Bus & P C § 16600, and in fact subscribed to the common law "rule of reasonableness" at the time with respect to postemployment restriclive covenants. In Lane Co. v Taylor (Ga App 1985) 330 SE2d I 12, an employe r sued its former employee for, among other things, violating an agreement that prohibited her for I year after termination from hiring employees or otherwise causing them to work for another employer. The agreement also provided that she would neither solicit the former employer's customers nor disclose confidential infor­mation. The court held the provision barring solicitation of customers void because it was not limited in geographic area, but found the more limited restriction on "pirating" of employees was reasonable and "needed to protect legitimate business interests." 330 SE2d at 114. The other G eorgia case, Harrison v Sarah Covemry, Inc. (Ga 1971) J 84 SE2d 448, involved contracts by the former employees that during their employment and for 2 years after termination they would neither disclose the identities of the former employ­er's employees nor attempt to induce them to leave the com-

pany. The Harrison court upheld these provisions as not being in restraint of trade, distinguishing cases involving

noncompetition agreements without territorial limitations.

According to the Harrison court, "[t]here was no restraint of trade because the defendants were free to work for a com­

petitor, so long as they did not interfere with their former

employer's contractual relationships nor divulge the names of former co-workers." 184 SE2d at 449.

Without considering any other case law or legal

authority-California, out-of-state, or federal-or even

§ 16600 itself, the Loral court agreed with the two Georgia courts' analyses and rulings upholding the postemployment

restrictions respecting communications with and regarding the former employer's employees ( 174 CA4th at 278; cita­

tions o mitted, emphasis added):

We agree with the reasoning of the Georgia courts. The potential impact on trade must be considered before invali­dating a noninterference agreement. A contract must be con­strued to be lawful if possible. Defendant is restrained from disrupting, damaging, impairing or interfering with his for­mer employer by raiding Conic employees under his termi­nation agreemen.t. This does not appear to be any more of a significant restraint on his engaging in his profession, trade or business than a restraint on solicitation of customers or on disclosure of confidential information. The May 4th agree­ment expressly permits Moyes to be employed by or engage in a competing business.

Responding to our invitation al oral argument, Moyes seeks to distinguish Lane Co. and implicitly Harrison on the basis, among others, they involved noninterference agree­ments of limited duration. He contends restrictive covenants of unlimited duration are more onerous and tend more to restrain trade. We note as a general proposition the duration alone of a restrictive agreement is not determinative of its enforceability. Rather, enforceabili ty depends upon its rea­sonableness, evaluated in terms of the employer, the employee, and the public. We also observe the Legislature has allowed business sellers Lo promise noncompetition to their buyers without time limitation other than for the period "so long as the buyer, or any person deriving title to the goodwill or shares from him, carries on a like business therein." ([Bus & PC§ 16601).) Courts faced with noncom­petition contracts without this limitation have upheld the contracts by reading the statutory limit into them. We need not and do not decide whether this noninterference contract would unreasonably and illegally restrain trade if applied to ocher conduct at another time. We determine only that there is no statutory problem in applying it to Moyes' conduct within a year of its execution.

This restriction only slightly affects Conic employees. They are not hampered from seeking employment with Aydin nor from contacting Moyes. All they lose is the option of being contacted by him fi rst. It does not restrain them from being employed by Aydin, contrary to defendant's argument. Equity will not enjoin a former employee from receiving and considering applications from employees of his former employer. even though the circumstances be such that he should be enjoined from soliciting their applications.

J

39 California Business Law Reporter November 2017 47

The restriction presumably was sought by plaintiffs in order to maintain a stable work force and enable the employer to remain in business. This restriction has the apparent impact of limiting Moyes' business practices in a small way in order to promote Conic's business. This nonin­terference agreement has no overall negative impact on trade or business. We hold that this contract, as construed, is not void on its face under [Bus & PC § 16601 ].

*** Under the termination agreement, plaintiffs' obligations

to make certain payments were conditioned upon Moyes' observation of his own promises. According to the opening statement, he almost immediately violated his promise not to raid Conic's employees by offering Larry Janssen a job at Aydin.

A few observations about the oft-cited Loral case are in order. First, the challenged covenant prohibited former employees from "interference" with and "disruption" of their former employer's business operations; it did not liter­ally prohibit former employees from "soliciting" their for­mer colleagues for hire. A "noninterference" or "anti­raiding" provision is qualitatively different from a nonsolicitation of employees or "no hire" provision, which naturally limits employee mobility and competition (for tal­ent and customers). Second, the court analogized to "trade route" cases upholding the general enforceability of nonso­licitation of customers provisions, but Edwards has since eviscerated the central holdings in those older cases; there is no principled distinction post-Edwards between nonsolicita­tion of customers and nonsolicitation of employees provi­sions; they both restrain trade and neither falls within one of the statutory exceptions. Third, the court relied on two Geor­gia decisions, notwithstanding the facts that Georgia ( 1) at that time subscribed to the common law "rule of reasonable­ness" and (2) did not have a law similar to § 16600, and that (3) the California Legislature rejected the common law "rule of reasonableness" when it enacted the predecessor to § 16600 in 1872. Fourth, the Loral court was careful to Ii mit its holding to the unique set of facts before it, and not to cre­ate a universally applicable rule endorsing "noninterfer­ence," let alone broad nonsolicitation or "no hire" employ­ment contract provisions in all situations.

Part II of this article, appearing in our January 2018 issue, will discuss cases since Edwards that consider the enforce­ability of postemployment nonsolicitation of employees pro­visions.

2017 Legislative Roundup

Introduction

Statutes of interest to the business lawyer, selected from all chapters enacted in 20 17, are listed below, alphabetically by topic. Text of the legislation is available online at http:// www.leginfo.ca.gov. Unless otherwise indicated, the effec­tive date for all statutes is January I, 2018.

Business and Professions

Attorneys

State Bar Sections will form the California Lawyers Association 2017 Stats, ch 422 (SB 36- Jackson) Amends Bus & P C §§6001, 6008.6, 6011, 6013.1 , 60 13.3, 6013.5, 6015, 6016, 6019, 6021, 6022, 6026.7, 6029, 6031.5, 6054, 6060.2, 6070, 6086.5, 6140.9, 6144, 6144.1, 6145, and 6232; adds Bus & PC §§6008.7, 6046.8, 6055-6056.3, 6069.5, 6140.02, 6140.56, and 6141.3; repeals Bus & PC §§6008.5, 6009.7, 6012, 6013.2, 6018, 6026.5, and 6140

The 16 voluntary Sections of the State Bar and the Cali­fornia Young Lawyers Association are set to become a newly formed private nonprofit association, the California Lawyers Association. Separation into a nongovernmental entity will allow former section members to hold meetings without public notice, and without forcing members to open their offices and homes to members of the public who choose to attend. Separation will also allow members to work by e-mail without concerns that the communications will vio­late the Bagley-Keene Open Meeting Act (Govt C §§ 11J20-11132), the California Public Records Act (Govt C §§6250-6276.48), or any other requirements normally imposed on governmental entities. With about 64,000 members at the time of the transition, the association will be the second larg­est voluntary bar association in the country, smaller only than the American Bar Association. The sections wi ll retain their financial reserves and intellectual property, including publications, educational materials, and membership lists. The State Bar will continue to collect dues for the associa­tion, offering a check-off option on future dues statements.

California Taxation

Returns and Payments

Voluntary Disclosure Program (VDP) expanded Stats 2017, ch 288 (SB 813- Committee on Governance and Finance) Amends Rev & TC§ 19191-19192

This bill expands the VDP to allow out-of-state partner­ships with nonresident partners and out-of-state adminis­tered trusts to participate in the program. The bill also pro­vides relief from the failure to file penalty for admitted VDP applicant S-corporations and limited liability companies. The bill would apply these changes to voluntary disclosure agreements entered into on or after January I, 2018.

Additional penalties under· Voluntary Disclosure Pro­gram agreements will be subject to waiver 2017 Stats, ch 176 (AB 1719- Committee on Revenue and Taxation) Amends Rev & T C §§ 19191 and 24872.6; repeals Rev & T c §19174

The Voluntary Disclosure Program (VDP) allows quali­fied entities, shareholders, or beneficiaries that may have