Rare Win for California Employers: Court Prevents Former Employee From Soliciting Customers

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In our blog post on April 10 – What To Do When a Key Employee Leaves: Seven Steps to Protect Your Business – we referenced a recent California case where the employer prevailed, winning an injunction that prevented its former employee from soliciting their customers. We promised further discussion regarding this rare win for an employer, as this case provides guidance on what may be considered trade secrets and how businesses may be able to prevent former employees from unfairly poaching their customers.

First, some background. Employee mobility rules supreme in California. That means a covenant not to compete between an employer and employee – which prohibits an employee from working for a competitor, even for a limited period of time – is essentially unenforceable. However, many California employers seek to prohibit former employees from going after their customers. Even that restriction came under attack in Retirement Group v. Galante. This is a 2009 case that challenged the enforceability of non-solicitation provisions, claiming they violate California Business and Professions Code section 16600 which presumes that any provision purporting to restrain one’s right to engage in a lawful business is void. It became common for former employees to argue that theGalante case prohibits any non-solicitation restraint. But now we have Pyro Spectaculars v. Souza, a recent case in Federal Court for the Eastern District of California (Sacramento) which gives employers a basis for enforcing non-solicitation of customers.

The facts of the case. Souza spent 17 years as an account executive with fireworks manufacturer Pyro. During that time, he had access to the company’s trade secrets and confidential information. Souza had signed an agreement where he acknowledged all account and customer lists were trade secrets belonging to Pyro and agreed not to divulge that information to anyone outside Pyro. When Souza departed to work for a competing fireworks company, he immediately began systematically soliciting Pyro’s customers to switch their business to his new employer.

Pyro did a forensic analysis of Souza’s computer and found that just before his departure Souza had downloaded files from Pyro’s unique customer database and used “wiping” software to try and cover his downloading tracks. There were also several thumb drives of confidential information Souza was unable to account for. (Discovering the surreptitious downloads drives home the importance of Step 6 in our April 10 blog – preserving the electronic evidence: in this case, it was critical to the employer prevailing.)  Armed with some pretty good evidence of Souza using Pyro’s confidential customer information to solicit its customers, Pyro filed a lawsuit seeking to stop Souza from such solicitation.

The court did ultimately impose a six-month injunction on Souza, prohibiting him from soliciting Pyro’s customers. How the court reached that conclusion provides a good blueprint for California employers seeking to protect their trade secrets in general and customer information in particular.

Pyro’s Customer Information Was Considered Trade Secrets: Souza admitted he used Pyro customer information in violation of his signed agreement but claimed the customer information could not be deemed confidential or trade secrets because it was publicly available and/or could have been discovered over time with basic research. The court, however, found that Pyro’s unique customer database was a “virtual encyclopedia of specific Pyro customer, operator and vendor information” which would allow a competitor to solicit Pyro’s customers much more effectively and efficiently. Also, the court made a cogent point: if the information was so publicly available why did Souza surreptitiously download all the files from the Pyro database? (Yeah, good question Your Honor!) Therefore, the court found that the unique and comprehensive Pyro customer information database was protectable as trade secrets.

Pyro Proactively Secured Its Trade Secrets: Souza next argued that Pyro had waived any argument that the customer information was confidential by failing to adequately keep it secure. While the court found that Pyro’s efforts to maintain the secrecy of the customer information was “not perfect,” it also found that the steps Pyro did take to protect it were reasonable under the circumstances. In a bow to common sense, the court held that an employer need not establish an “impenetrable fortress” to protect its trade secrets.

While this decision recognizes California’s public policy in favor of employee mobility and the right of former employees to compete with their former employer, it also balances the rights of employers to protect their trade secrets and prevent former employees from unfairly competing. The takeaways from this case are 1) customer data may be treated as confidential trade secrets; 2) employers must take reasonable steps to protect their confidential information; and 3) where a former employee uses protected trade secrets to unfairly solicit customers, the court can craft an equitable remedy to prohibit such solicitation.

Pyro Spectaculars North, Inc. v. Steven Souza, Case No. 12-CV-00299-GHH

Retirement Group v. Galante, 176 Cal. App. 4th 1226 (2009)