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Trade Secret Misappropriation and Non-Competes Across (California) State Lines: What Law Governs?

June 13, 2011

Choice of law issues permeate trade secret and non-compete cases because employers are nationwide and, employees themselves are extraordinarily mobile. Many decisions begin with a discussion of relevant choice of law issues, but often avoid deciding them by finding that the result would be the same under any of the applicable state laws, which are often similar. Not so with California's trade secret case law, which differs significantly from other state trade secret laws and has taken a hard line approach against enforcement of common non-compete covenants in employment contracts. In the end, very few cases squarely address the issue: Which law applies where, among the former employer, current employer, and employee, some but not all are California residents?

All employers, whether or not they do business in California, should therefore take note of a recent Massachusetts District Court case enforcing a covenant not to compete against a California resident. See Aspect Software, Inc. v. Barnett, --- F. Supp.2d ---, No. CIV.A. 11-10754-DJC (D. Mass. May 27, 2011). In Aspect, the Court enforced a Massachusetts non-compete clause against a California resident working for a California company, despite California's public policy against non-competes and despite case law casting doubt on the existence of a trade secret exception to this policy under California law.

Plaintiff Aspect Software sued Defendant Gary Barnett, its former Executive Vice President and Chief Technology Officer, alleging that Barnett breached his contract with Aspect when he accepted a position in California with rival corporation Avaya. While employed by Aspect, Barnett worked primarily out of an office in Tennessee, but also maintained an office in Aspect's world headquarters in Massachusetts. Barnett's employment agreement with Aspect included a non-compete provision as well as Massachusetts choice-of-law clause. Aspect, --- F. Supp.2d at *4.

In opposition to Aspect's motion for a preliminary injunction, Barnett and Avaya (as amicus curiae) argued the Court should not honor the choice-of-law provision because it ran afoul of California's fundamental policy against non-competes. The Court disagreed, finding that the non-compete clause was necessary to protect Aspect's trade secrets, restricted only employment that would threaten Aspect's trade secrets, and did not otherwise restrict Barnett's ability to work for another competitor. The Court also found that California's twin interests in the freedom of its residents to seek employment and the freedom of its employers to hire the employee of their choosing did not materially outweigh Massachusetts' interest in enforcing its contracts. Id. at *18.

Specifically, the Court determined that California's interest in the case was weaker than or at best equal to Massachusetts' interest because the employment contract was negotiated by a Massachusetts company for an employee who worked at least in part in Massachusetts, and any harm caused by its violation would be felt in Massachusetts. The Court further concluded that, even in the absence of an effective choice-of-law provision, California law would not govern, citing primarily the expectations of the contracting parties. Id. at *19.

Also worth mentioning was the Court's rejection of Barnett's and Avaya's arguments that the clause's prohibitions were vague and overly broad. By its terms, Barnett's contract prohibited him from participating in "any business in which he would be reasonably likely to employ, reveal or otherwise utilize trade secrets." The Court concluded that it would "have no trouble understanding and applying the concept of reasonable likelihood," noting that the very standard the Court had to evaluate in ruling on the motion for preliminary injunction was a "reasonable likelihood of success on the merits." Id. at *23-25.

Nor was the Court compelled to find otherwise by the admittedly significant efforts Barnett and Avaya were making to assure the protection of Aspect's trade secrets, including Barnett's offer to provide monthly declarations to Aspect certifying his non-use and non-disclosure of any Aspect information. The Court said this was not enough: "[I]t is difficult to conceive how all of the information stored in Barnett's memory can be set aside as he apples himself to a competitor's business and products. [W]hat Barnett knows about Aspect is bound to influence what he does for Avaya, and to the extent it does, Avaya will be damaged." Id. at *28-29.

Many questions remain, of course, about whether the same analysis would apply to a non-executive or to an employee who resided in California at the time he entered into the employment contract. However, if followed, the case may present further opportunities for employers to gain broader acceptance of carefully drafted non-competes. And employees with those clauses should not assume they can avoid their effect simply by taking a job in California.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Mark A. Klapow
Partner – Washington, D.C.
Phone: +1.202.624.2975