Consider the following scenario: You’re a California resident and offered employment by a California or a foreign employer. As a condition of your employment, you’re asked to sign one or more of a noncompete, a nonsolicitation, a confidentiality, and an invention assignment agreement. After a few months or years, you decide to quit and start your own business that competes directly with your employer. What, if anything, can your employer do to prevent you from leaving and competing with it? The short answer is: Not Much!

I. Noncompete, Nonsolicitation, and Confidentiality Clause

In general, any agreement that violates the Cal. Bus. Prof. Code § 16600 is illegal, therefore, invalid, unless one of the statutory exceptions (Cal. Bus. Prof. Code §§ 16601, 16602, and 16602.5)[1] or the trade secret common law exception apply. Section 16600 “invalidates provisions in employment contracts that prohibit ‘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.’” Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 945-46 (2008) (quoting Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239 (1965) (Emphasis added). This provision “evinces a settled legislative policy in favor of open competition and employee mobility.” Id. at 946. “In California, ‘every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.’ Cal. Bus. Prof. Code § 16600.” Applied Materials v. Advanced Micro-Fabrication Equip, 630 F. Supp. 2d 1084, 1089 (N.D. Cal. 2009).

Even the so-called common law exception is on a shaky ground as the Court in Power Integrations, Inc. v. De Lara, No. 20-cv-410-MMA (MSB), at *25-27 (S.D. Cal. Mar. 26, 2020) analyzed the law as follows:

“On one hand, some decisions have found that to the extent that an exception applies, it applies in the context of a tortious wrong independent of any contractual relationship. See RetGrp., 98 Cal. Rptr. 3d at 593. In The Retirement Group vGalante, the California Court of Appeal determined the following distinction between contract and tort: We distill from the foregoing cases that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business, but a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer. Viewed in this light, therefore, the conduct is enjoinable not because it falls within a judicially-created “exception” to section 16600’s ban on contractual nonsolicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking.

On the other hand, the court has also held that “under Edwards, Business and Professions Code section 16600 generally prohibits the enforcement of a nonsolicitation agreement in all cases in which the trade secret exception does not apply.” WankeIndus., CommercialResidentialIncvKeck, 147 Cal. Rptr. 3d 651, 670 (Ct. App. 2012) (referring to Edwards, 189 P.3d 285, which “[did not] address the applicability of the so-called trade secret exception to section 16600 . . . .”). However, because Edwards‘ did not involve the “so called trade secret exception,” Edwards, 189 P.3d at 291 n.4, its statements regarding the existence or the applicability of a trade secret exception is dicta. Additionally, Edwards noted that “[w]e conclude that section 16600 prohibits employee noncompetition agreements unless the agreement falls within a statutory exception.” Edwards, 189 P.3d at 291 (emphasis added) (citing Cal. Bus. & Prof. Code § 16600); see also Dowell vBiosense WebsterInc., 102 Cal. Rptr. 3d 1, 9 (2009) (same). In detailing how California Courts have not embraced the “Ninth Circuit’s narrow-restraint exception,” the Edwards court stated that “[we] 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.” Id. at 293. This language, the explicit statutory language of “[e]xcept as provided in this chapter,” and the California Legislature’s intent plainly exclude judicially-created exceptions to § 16600. Cal. Bus. & Prof. Code § 16600. Therefore, this Court declines to find that a trade secret exception to § 16600 exists to the extent that Plaintiff alleges a breach of contract cause of action.

II. Invention Assignment Clause

In general, invention assignment agreements that are limited to the duration of the employee’s work with the employer are enforceable regardless if the invention is based on the employer’s confidential information. MattelIncvMGA Entm’tInc., 782 F. Supp. 2d 911, 946 (C.D. Cal. 2011) (“As long [as] the assignment [of ideas and inventions] does not extend to post-employment work, it is generally enforceable.”) However, if the invention assignment agreement extends beyond the length of the employment, they must be limited to those based on the employer’s confidential information. Conversion Logic, Inc. v. Measured, Inc., Case No: 2:19-cv-05546-ODW (FFMx), at *12 (C.D. Cal. Dec. 13, 2019) (citing, Winston Research CorpvMinnesota Mining & MfgCo., 350 F.2d 134 (9th Cir. 1965). (“Intellectual property assignment provisions in employment contracts have been upheld when limited to inventions that are based on the employer’s confidential information.”)

Any provision which obligates the employee/shareholder to assign all his/her inventions even after he/she is no longer an employee of the Company is invalid. Furthermore, if it obligates the employee/shareholder to assign all his/her inventions related to the business of the company without limiting them to those “that are based on confidential employer information” Conversion is invalid. See, Conversion Logic, Inc. v. Measured, Inc., Case No: 2:19-cv-05546-ODW (FFMx), at *12 (C.D. Cal. Dec. 13, 2019) (citing, Winston Research CorpvMinnesota Mining & MfgCo., 350 F.2d 134 (9th Cir. 1965). (“Intellectual property assignment provisions in employment contracts have been upheld when limited to inventions that are based on the employer’s confidential information.”)

If you need help regarding leaving your present employer to start your own business or joining a competitor, or other related intellectual property matters, contact Ahmadshahi Law Offices today and get an initial consultation.

Michael M. Ahmadshahi concentrates its practice on patents, trademarks copyrights, trade secrets and other intellectual property and business law. Call us toll free at (800) 747-6081 or direct at (949) 556-8800 or email and let us help you with your IP and business matters.

[1] Although, the applicability of the statutory exceptions has not been analyzed, it is unlikely they would apply as they pertain to the sale of a business entity or the sale of a shareholder, partner, or a member selling all of his/her shares/interest that would include the goodwill of the entity.