Court of Appeal of the State of California, Second Appellate District, Techno Lite, Inc., v. Emcod, LLC, Docket No. B284989 c/w B289486

Labor Law

Agreement Not to Compete

Contract Drafting

Preparations to Compete Before Resigning

Solicitation of An Employer’s Customers

Interference with Prospective Economic Advantage

Cause of Action for Breach of Contract

California Law

Business and Professions Code section 16600 has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends. (See Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242 [42 Cal. Rptr. 107, 398 P.2d 147].) However, the statute does not affect limitations on an employee’s conduct or duties while employed. ‘While California law does permit an employee to seek other employment and even to make some “preparations to compete” before resigning [citation], California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ “undivided loyalty.” [Citation.]’ (Fowler v. Varian Associates, Inc. (1987) 196 Cal.App.3d 34, 41 [241 Cal. Rptr. 539].) (Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 509 (Angelica).)

In Mamou, (Mamou v. Trendwest Resorts, Inc. (2008) 165 Cal.App.4th 686 (Mamou)) the court found employees could prepare to compete with their employer “‘so long as they do so on their own time and with their own resources.’” (Mamou, supra, 165 Cal.App.4th at 719.) But the court recognized “‘while an employee may secretly incorporate a competing business prior to departing, the employee may not use his or her principal’s time, facilities or proprietary secrets to build the competing business.’” (Ibid., quoting Chemfab Corp. v. Integrated Liner Tech. Inc. (N.Y. App. Div. 1999) 263 A.D. 2d 788, 790.) As particularly relevant here, the court noted that “‘solicitation of an employer’s customers likely will constitute a violation of the duty of loyalty in almost every case . . . .’” (Ibid., quoting Futch v. McAllister Towing of Georgetown (1999) 335 S.C. 598, 609-610.)

Appellants do not cite -- and we have not found -- a single case in which Section 16600 was held to invalidate an agreement not to compete with one’s current employer while employed by that employer. The public policy behind Section 16600 is to ensure “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice” (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859) and to encourage “open competition and employee mobility” (Edwards, supra, 44 Cal.4th at p. 946); it is not to immunize employees who undermine their employer by competing with it while still employed. “We state the obvious in observing that no ‘firmly established principle of public policy’ [citation] authorizes an employee to assist his employer’s competitors.” (Fowler v. Varian Associates, Inc., supra, 196 Cal.App.3d at p. 43; see also ibid. [a company has good cause to terminate an employee who helped “in obtaining financing for an enterprise organized to become [his employer]’s direct competitor”].) It should be even more obvious that no firmly established principle of public policy authorizes an employee to become his employer’s competitor while still employed. Section 16600 is not an invitation to employees to bite the hand that feeds them.

Interference with Prospective Economic Advantage:

Substantial evidence supports the trial court’s finding that Techno Lite likely would have realized an economic benefit if not for appellants’ wrongful actions. It is undisputed that the customers in question had all previously purchased product from Techno Lite. This fact alone supported the inference that Techno Lite’s relationship with such customers would have continued, thus providing it with an economic benefit. Indeed, appellants admit Village View Lighting was an account Techno Lite would not have lost, absent Emcod’s actions. The sole evidence to challenge this inference came from Drucker, whom the court expressly found to be not credible.

Cause of action for breach of contract:

“The elements of a cause of action for breach of contract are ‘“(1) the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to plaintiff.”’” (Tribeca Companies, LLC v. First American Title Ins. Co. (2015) 239 Cal. App.4th 1088, 1109.) “Mutual assent or consent is necessary to the formation of a contract.” (Alexander v. Codemasters Group Limited (2002) 104 Cal.App.4th 129, 141.)

(Court of Appeal of the State of California, Second Appellate District, January 21, 2020, Techno Lite, Inc., v. Emcod, LLC, Docket No. B284989 c/w B289486, Certified for Partial Publication)