The Ninth Circuit Reaffirms that Non-Competition Agreements are Unenforceable Under California Law Unless Necessary to Protect an Employer’s Trade Secrets.

Posted: Thursday, October 23, 2008

By: Joshua C. Dickinson

Topic: Non-Compete Cases

The Ninth Circuit Court of Appeals, in the case of ASSET MARKETING SYSTEMS, INC., v. KEVIN GAGNON, d/b/a Mister Computer, 542 F.3d 748 (9th Cir. 2008), examined a non-competition and trade secret dispute involving the alleged unauthorized use of source codes in computer software.  The defendant allegedly obtained the source code through former employees who came to work for the defendant.  The court rejected all counts, finding that the defendant was given an unconditional license to use the software, and therefore, no trade secret violation occurred.  With respect to the non-compete agreements, the court held:

Furthermore, having concluded that AMS was entitled access to this trade secret, we also conclude that the district court did not err in holding that the non-competition agreements with Gagnon's employees were invalid. Under California law, non-competition agreements are unenforceable unless necessary to protect an employer's trade secret. SeeCal. Bus. & Prof.Code § 16600 (voiding any contract that restrains anyone from engaging in a lawful profession, trade, or business); Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285, 288 (2008) (Cal. Bus. & Prof.Code § 16600 invalidates noncompete contracts unless they are necessary to protect an employer's trade secrets); Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App.4th 881, 72 Cal.Rptr.2d 73, 85 (1998) (same). Because the non-competition agreements were no longer necessary to protect Gagnon's trade secrets against AMS, they were no longer enforceable in this case.

California remains a difficult state to enforce non-compete and related agreements.