November 2020

Despite being a single sentence, Business and Professions Code § 16600 establishes substantial rights for employees to freely work in the profession of their choosing.  Section 16600 says in its entirety: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” 

Section 16600 makes most non-compete agreement unenforceable in California. Understandably, section 16600 frustrates employers who have spent time and expense training employees only to see those employees freely leave to work for the competition. While employers cannot prevent employees from working for the competition, employers often attempt to prevent employees from using the information they learned while employed to help the competition. Many employers, therefore, require employees to enter into confidentiality agreement to protect trade secret and proprietary information.

Brown v. TGS Management Company, LLC (2020) Cal. App. LEXIS 1074 is an example of what not to do when preparing these agreements. In Brown, the confidentiality agreement was so broadly written that it infringed on the employee’s rights to freely work under section 16600. The Brown decision underscores that section 16600 is a public policy and that an arbitrator exceeded his authority by enforcing provisions that infringed on an employee’s right to work.

Background

Richard Hale Brown (“Plaintiff” or “Brown”) was employed by TGS Management Company (“Defendant” or “TGS”) in a specialized area of equities trading. Brown signed an employment agreement with TGS that included broad non-compete and confidentiality provisions. Brown and TGS also entered into a bonus agreement where Brown could earn deferred compensation for meeting performance levels. The bonus agreement stated that Brown would forfeit the compensation, even post-employment, if he breached the employment agreement’s confidentiality provisions.

TGS terminated Brown in early 2016.  At the time, TGS still owed Brown around $1,000,000 in deferred compensation which Brown would receive even after termination. 

Later that year, Brown filed a complaint against TGS asking the court, in part, to state that his ability to compete with TGS would not jeopardize his pending deferred compensation. Because his employment agreement contained a mandatory arbitration clause, Brown also filed a petition to compel arbitration. Brown’ petition included a draft copy of a separation agreement that contained confidential information about TGS’s profits and bonus calculations.

Arbitration

To say that arbitration did not go Brown’s way would be an understatement. The arbitrator dismissed most Brown’s claims on summary disposition. After a five-day trial on the few remaining issues, the arbitrator found that Brown forfeited his right to the deferred compensation because he breached the confidentiality provision when he improperly disclosed the separation agreement in the arbitration petition. The arbitrator also held that Brown’s request for finding that the confidentiality provisions were invalid under section 16600 was not “ripe” because “it concerned only ‘anticipated further employment.’”  Adding to Brown’s woes, the arbitrator found that Brown acted in bad faith by bringing claims without merit and ordered Brown to pay TGS over $2,500,000 in legal fees and costs. 

The trial court upheld the arbitrator’s ruling and Brown appealed.

Appeal

The Court of Appeal took the rare step of vacating the arbitrator’s award. The court held that the right to work in the field of one’s choice is a statutory right and protected as a matter of public policy. The court rejected the arbitrator’s finding that the matter was not “ripe,” holding that employees can seek judicial determination as to whether an anti-competition clause is facially void without further analysis of the employee’s current employment situation. 

The court also found that the employment agreement was anti-competitive. TGS’s definition of “confidential information” was so broadly worded that it had the practical effect of barring Brown from trading securities in any capacity for the remainder of his life. The confidentiality provision, therefore, was facially invalid. The court also reversed the arbitrator’s decision that Brown forfeited his deferred bonuses because the arbitrator relied on the void confidentiality provisions in making his ruling. 

Conclusion

Brown is a reminder that confidentiality provisions must be narrowly tailored so that the protections truly apply to trade secrets and proprietary information. If you need assistance drafting tailored confidentiality agreements, or drafting other employment documents, including contracts and handbooks, Gibbs Giden can help.

For more information contact:

Matthew Wallin, Esq.

mwallin@gibbsgiden.com

(310) 552-3400

Matthew Wallin is a senior associate in the Los Angeles office where he practices labor and employment law.  He has extensive experience defending private business and public entities in litigation involving discrimination, harassment, retaliation, and wage and hour disputes. He has also defendant against assault and workplace violence claims.  

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