Insurance Producer Mobility and The California Trade Secrets Act
By David R. Harrison, Esq.
January 1997

Section 16600 of the California Business and Professions Code provides that a contract whereby anyone is restrained in pursuing a lawful trade or profession is to that extent void. California courts have generally applied §16600 to invalidate agreements between employers and employees under which employees are restricted, after termination, from competing with their former employers.

In the past few years, however, under the impetus of the Uniform Trade Secrets Act (California Civil Code §§3426.1-3426.10), and the interpretations of that Act rendered by California appellate courts, new rules have emerged. If the trend of these recent cases continues, it will be more difficult for producers to enjoy the mobility of self and "book" which was previously the case.

New employers will have to evaluate with great care whether the "red-hot" producer they propose to hire can bring with him his customer base, unaccompanied by an expensive lawsuit.
Current employers, if they are rigorous in requiring confidentiality agreements and in otherwise making clear that specified business information is to be considered "confidential," may enjoy a much greater level of comfort than before if threatened with the departure of a "heavy-hitter" producer whose "book" has some special characteristics not "generally known" to competitors in the industry.


  1. Restraints on competition are void, except when ancillary to the sale of one's entire interest in the ownership and good will of a going business.
  2. Covenants and agreements against soliciting customers of the old employer are not generally enforceable, except to the extent necessary to protect trade secrets {1}.
  3. An agreement does not make a trade secret out of information that is not in fact or in law a trade secret. The agreement is evidence, however, that the employee knew that the employer regarded the information as confidential. The agreement may also have value, if it is specific, in focusing the Court's attention on the categories of information to evaluate in determining whether trade secrets do exist.
  4. Where there is actual or threatened use of Trade Secret information in breach of a non-solicitation covenant, courts can and will grant injunctions to enforce the covenant, and a variety of remedies in damages. {2} The contract between the employer and the employee does not, by itself, make the information confidential. That issue is decided by the Court --- if the information is in fact and in law a trade secret, a non-solicitation covenant can be enforced.


  1. Definition. (Civil Code §3426.1(d))

Trade Secret is:

    1. Information, including * * * a compilation,
    2. That has actual or potential economic value by reason of not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
    3. Which is the subject of reasonable efforts under the circumstances to maintain its confidentiality.
  1. Examples.
    1. Expiration data
    2. Specifics of coverages and values
    3. Special contact people
    4. In this era of legal rebates, commission information
    5. Special rating systems
    6. Creditworthiness and financial strength data
    7. Housekeeping information
    8. Safety diligence
    9. Loss experience
    10. In some instances, possibly, special lines markets.

Confidential information and trade secrets can include:
Internal procedures, programs and forms; rating guides and manuals; names and addresses of insured customers; identities of key contacts; information regarding personal preferences, habits and insurance needs of customers and prospects; other personal information as to customers and prospects; locations and descriptions of insured properties or properties proposed to be insured; expiration data of insurance policies; insurance daily reports; premium quotation data; credit histories; special tracking programs; coverage summaries; renewal binders; claims and litigation reports; and other similar information which is not easily available from public sources, as well as compilations of information prepared by or for the employer, where such compilations are not readily available from public sources in their compiled form.

  1. Customer Identities.

The fact that a client is a customer of a particular brokerage house is not a trade secret, unless that fact conveys other information which is not generally known.
Case Examples:

  1. American Credit Indemnity {3} case.

The product was credit insurance. Affidavits established that the universe of potential customers consisted of all businesses that carried more than $2 million in receivables, and that only about 6% of this group actually bought credit insurance.
Affidavits further established that it was easier to sell credit insurance to a business that had bought it in the past than to persuade a non-buyer that it was a good idea. Renewal persistency in the book taken by defendant in the case was about 75%. She took 43 customers from an office that serviced 136. Most of these were customers she had developed herself during her employment.

  1. The customer identities were a trade secret because they disclosed a fact not generally known, namely that these 43 businesses actually purchased credit insurance.
  2. The identities could be used solely for the purpose of announcing that the employee had changed employment. The announcement had to be, however, completely bland and with no hint or suggestion of "solicitation."
  3. The identities could not be used for solicitation, and the defendant was enjoined from soliciting her old customers.
  4. ABBA Rubber {4} case.

The product was rubber rollers. Former employees solicited old customers. Affidavits were to the effect that time and effort went into finding out who used rubber rollers. Plaintiff's list of customers was held to be a trade secret, and defendants were enjoined from soliciting.
Defendants argued that the identities of customers were "readily ascertainable" from public sources. Court replied that, while the Uniform Trade Secrets Act, as proposed, originally provided that information was not a trade secret if "readily ascertainable," the California version specifically omitted that exception, and the information had to be actually known (either to the public or to one or more competitors who could derive value from it) to avoid trade secret status.
In a footnote, the Court stated that it would be a good defense to show that (a) virtually all manufacturers of certain types of products used rubber rollers; (b) these manufacturers were easily identifiable; and (c) defendants' knowledge of plaintiff's customers resulted from this public identification process and not from plaintiff's records. In such case, there would be no "misappropriation," even though the customer list as compiled by plaintiff was still a trade secret.

  1. Courtesy Temporary Service {5} case.

The product was temporary help services. All employers were potential customers, but there was no ready way to determine which ones actually used temporary help. The employment agency's customer list had economic value because it disclosed a fact which was not generally known, namely, the identities of employers who had already manifested their willingness to use temporary help.

  1. Other Statutory Provision. See California Labor Code §2860 {6} , and California Business & Professions Code §17200 {7} .


  1. If the customer identities are in fact a trade secret:
  2. The employee (not the new employer) can mail out completely bland informational announcements of his relocation and nothing more {8} . These should be limited to customers with whom he has personally dealt.
  3. He can service any business and respond to any inquiry initiated by the customer
  4. He cannot initiate or invite inquiries or solicit business from the customers, even those he personally serviced during his employment.

If anyone finds himself in this situation, rigorous record-keeping is essential to establish that customer contact was initiated by the customer in response to the general announcement, and not by the former employee through solicitation.

  1. If the customer identities are not a trade secret:
    1. The employee is free to solicit his old customers in any event.
    2. He is not free to take or use traditional types of confidential information (e.g. expiration data, loss histories, specific file information and the like). Such information, if needed, will have to be obtained from the customer.
  2. In the insurance context:

The American Credit Indemnity case would indicate that value based on not being generally known can result from the fact that the list is a selection, winnowed from a larger universe of prospects for the insurance product which the agent proposes to sell. The selection base may be that the list shows a willingness or unwillingness to purchase the type of insurance product offered; it may also be a selection of those customers who are particularly creditworthy; or who have unusually good loss or claims experience; or who are particularly rigorous (or not careless) about safety standards (as workers compensation clients); or who are insurable (or uninsurable, as in a life insurance context); or whose property presents special risk characteristics (e.g. "high-end" or concours d'elegance motor vehicles).

  1. Where the customer identities have no underlying organizational principle and are simply customers who have bought general insurance coverages in accordance with their individual needs, the identities would not be confidential; no trade secret would be involved; and direct solicitation should be allowed.
  2. Particular types of business:

Life insurance customers. It is arguable that identities would be, per se, a trade secret, on the theory that only a limited percentage of the potential market in fact buys life insurance and is insurable (analogous to the American Credit case where 6.5% of the potential customers actually had shown a willingness to buy credit insurance).

  1. General personal lines such as auto and homeowners insurance. No special class would appear to be involved, as virtually every prospect buys such insurance. Even here, however, if the customer mix is selective based on, for example, drivers eligible (or ineligible) for good driver discounts, or "high-end" vehicles, the issue of whether an identity is a trade secret may be clouded.
  2. Commercial property and casualty insurance. The market can in most cases "tell at a glance" whether a concern is a buyer, simply by its being an ongoing business in commerce, and customer identities should not be held to be trade secrets, except where, as in the American Credit Indemnity case, a special product is involved that is not normally marketed as part of a typical commercial package. Incidental commercial coverages would be included here, e.g business interruption etc., since they are part of the package of coverages that any competent salesman would try to sell, and they are normally not sold separate from the overall commercial package.

    Here again, however, if the customers are classified in terms of size, creditworthiness, safety compliance, good loss history, special risk characteristics, or similar special information, the identities may be protectable trade secrets.
  3. Employee benefits products. The issue will be whether others in the marketplace --- or at least some other identifiable competitors (other than the former employer) --- are aware that particular employers do in fact purchase employee benefits programs. If this information is not generally known, the situation may be analogous to the credit insurance case; i.e., knowing which potential customers already buy the type of product is information which is not generally known and which has economic value in that (a) only a limited number of employers buy employee benefit products; and (b) the likelihood of finding a willing prospect is much greater is the prospect is already a buyer of employee benefit products.

    If you are not sure that the identities of buyers are generally know, the \safest course is to treat the identities as confidential. and follow the procedures described at pages 9 - 10, below (Part II, Section 2.b.(1) - "Notices to Clients - If the identities of the clients are or may be a trade secret.").

When we say that a customer identity is not a trade secret, this does not mean that a comprehensive list of customers would not be protected. The list, as a compilation, has the potential of having independent economic value by reason of not being generally known.

Thus, see Trade Secret definition (CC §3426.1):
*** [I]nformation, including a formula, pattern, compilation, program, device, method, technique, or process that * * * derives independent economic value, actual or potential, from not being generally known to * * * other persons who can obtain economic value from its disclosure or use.
Note that while the identity of a customer may not be a trade secret, a list of the customers of a company can be regarded as a "compilation." As such, it may have independent economic value in certain respects, if it were known to a competitor. Where the list, regardless of its selection base, is the product of extensive solicitation, advertising, entertainment and other substantial expense, the Courtesy Temporary Services case would indicate that it may be held to be a trade secret. What is the rationale that produces this result?
Per the Courtesy decision, the value may be negative, i.e. the list, by disclosing who does business with an entity, also discloses who does not do business with that entity (thereby reducing fruitless solicitations), and this information has value, particularly where the entity is selling a specialized product {9} .
Is there a rationale where the product is not specialized? Arguably, there is in the following respects:

  1. The list may disclose geographic information, i.e. the prospects within a limited distance of a business that are readily reachable by that business and which have determined that doing business at that location suits their convenience needs.
  2. If a competitor is predatory in its intentions, i.e. wants specifically to destroy or injure the business whose list it uses, the list gives information as to the "targets" for such predatory activity {10} .

Note that the list is a "compilation" of customers and, in its compiled form, is of a different character than simple identification of users of a product (which may be publicly known). It discloses (a) geographic preferences (perhaps); and (b) a competitor's vulnerability.
Practice Pointer:
If a producer is going after customers of his former employer, it is virtually impossible to say with certainty that all he is using is the customer identities, and none of the traditionally confidential information that is acknowledged as such in the insurance industry.
The more recent cases seem to insist that the employee wipe clean the slate of his memory. If you are not entirely sure that your customer list is confidential, you should also allege that the employee is using not only the identities but also the confidential information in your files which he has either copied, taken, or retained in his head. His having this information gives him an "edge" in the marketplace which he gained only as a result of having access to the employer's confidential information during employment.


  1. Determining Whether the Client Identities are Trade Secrets

Evaluate whether the fact that clients bought insurance from the prior employer discloses some other fact which is not generally known and which would assist a competitor.
"Other facts" not generally known are facts which constitute an organizing principle underlying the client list. These would include such things as (a) the fact that they buy a particular type of insurance in a marketplace where there are many potential customers but only a relatively small percentage of actual buyers; (b) creditworthiness; (c) loss history; (d) safety records; (e) diligence in implementing safety or liability avoidance programs; (f) use of self-insurance; (f) special risk characteristics, etc.
Use your imagination and "brainstorm" with your fellows as to the kind of information that would help you, as a competitor, if you could derive it by inference from a customer list.
If nothing comes up in this exercise, consult experienced counsel and brainstorm with him or her. Have counsel privately interview your new employee at length as to any special attributes of his clients that might be otherwise secret. If still nothing comes up, the client identities are probably not trade secrets.

  1. Contacts with Clients re Move.
    1. Best course. The prospective new employee should have no contact with old clients regarding move until after employment has ceased with prior employer.

Situations arise, however, where, because of a long-time personal relationship between the producer and the client, the producer cannot reasonably avoid telling his client that he is leaving the current employer. If this happens, the producer should not disclose the identity of his new employer nor discuss in any manner the client's insurance until after the producer has left the old employment.

  1. Notices to clients. As soon as the employee has left the former employment, the employee can notify his old clients that he has moved. Where the employee's business is based primarily on personal contacts, you may want to use newspaper ads, with the employee's picture, and other publicly disseminated announcements (e.g. trade journals).
  2. If the identities of the clients are or may be a trade secret:

A suggested process for handling this problem is:

    1. The new employer makes its own list and sends it own announcements, complete with trumpets and fanfare, with no input from the new employee as regards the mailing list; and
    2. The new employer supplies separate and completely bland announcements to the new employee to send to his old customers, with the express agreement that the employee:
      1. will not add anything else to the printed announcements;
      2. will be solely responsible for determining the recipients; and
      3. will not disclose his mailing list to the new employer.

Personal announcements may be sent by the employee to the employee's old customers with whom he personally dealt, so long as the announcements contain no "solicitation" or invitations to call.

Announcement must be totally bland, should not "tout" the capabilities of the new employer and should not "invite" further contact. Otherwise, the announcement may be regarded as a prohibited "solicitation."

  1. Example of acceptable form of "non-soliciting" announcement by the new employer (to be sent by employee only, however, to private list):

XYZ Company is pleased to announce that
[name of producer] has joined the firm
as [capacity in which hired].
XYZ Company
[Address and Telephone Number]

  1. Acceptable form of announcement by the employee:

[Name of employee]
announces that he has relocated his business office
as of [date of relocation] to:
[Name, Address and Telephone of New Employer]

  1. If the client identities are not a trade secret:
    1. The announcements can do all the "touting" and "trumpeting" you think appropriate.
    2. Telephone calls and direct solicitation are permitted. Source of information re clients being contacted should not be the result of pilferage from the records of the former employer.
    3. The employee can contact and solicit those clients whom the employee personally serviced during the prior employment, but he should not use or suggest that he may have any information that might be deemed confidential (such as expiration and renewal data). The employee should, at first contact, make clear that he has no information concerning the specifics of the client's insurance needs and should request a meeting or other procedure to obtain this information. He should get all the information he can (even information he may already have in his head) and should document its source. Trade secret information relating to a particular client will not be trade secrets of the former employer once it is newly supplied directly by the client to the former employee after the old employment has terminated {11} .
  2. Compiling mailing lists:

If a mailing list can be compiled without any strenuous effort from public records or directories, and the list is in fact compiled from these sources by the new employer, as opposed to being generated from lists belonging to old employer, the independent compilation should be made and documented, with witnesses who can testify as to how it was prepared. General "touting" announcements can be sent to everyone on such a list by the new employer, so long as the new employee does not provide identification of the list members who are his old customers.
Note that the new compilation made by the new employer may itself become a trade secret of the new employer if the information on the list is confined to use by its own employees and is otherwise subject to reasonable efforts under the circumstances to maintain confidentiality

  1. Records from Former Employment.
    1. Unless the employee had a specific understanding with the former employer as to the employee's "ownership" of clients or expirations, the rule here is:

This applies, for example, to expiration data on client cards that the employee may have personally maintained. It also applies to data he may have in his home computer. Where the employee knows in his head that policies have "landmark" expirations (e.g. year-end, quarter-end, etc.), the employee can use what is in his head, if this information is also generally known by competitors.
Many producers take work home. Intentionally or inadvertently, they may accumulate volumes of data or copies of office materials. Whether or not these materials are used in the new employment (and they should not be), their very existence and retention by the employee creates a possibility of their improper use in competing with the old employer.
Such materials must be assembled and put out of the reach of the employee and of the new employer immediately at or prior to commencement of the new employment.
Many producers take work home. Intentionally or inadvertently, they may accumulate volumes of data or copies of office materials. Whether or not these materials are used in the new employment (and they should not be), their very existence and retention by the employee creates a possibility of their improper use in competing with the old employer.
Procedures for accomplishing this may include, depending on the circumstances (a) trashing or otherwise destroying the materials en masse; (b) returning them to the former employer; or (c) immediately delivering them to a third party, such as legal counsel for the new employer, who is identified to the former employer as being their custodian and the contact for obtaining them
In all events, the materials must not be provided or displayed to the new employer for use, copying or any other economic purpose.

    1. Where client identities are not trade secrets, make contacts with old clients on an early "blanket" basis to obtain expiration and other data. The employee can then schedule renewal calls. Where the identities are trade secrets, use the first contact from the client primarily as an information-gathering opportunity.
    2. The new employer should require a written warranty and commitment from the employee that he has not taken, and will not use, any confidential information generated from his former employment.
  1. Keeping Track of Contacts and Sources.

Keep a careful and running log of client contacts that develop. This should be a day-to-day routine, and the employee should be provided with appropriate forms for this purpose.
Unless it is clear that no action is contemplated by the former employer, client contact records should be kept for 4 years from the date coverage is placed. They may be essential data for counsel in event of litigation.

  1. Broker of Record Letters.

Single customers, such as individuals or business concerns, may be asked for broker of record letters, which should be sent to the former employer, and, if known without using the old employer's records, to the carriers that may be affected. Usually, the employee can get the identity of the carrier from the customer at the time the employee gets the broker of record letter. If the customer supplies the employee with essential expiration data and other necessary underwriting information, it may not be necessary to obtain an immediate broker of record letter. Instead, the customer can be calendared for solicitation at time of renewal based on the information the customer has supplied.
Group or association programs may be a bit more difficult to deal with, since some carriers, if threatened by the former employer, may want individual broker of record authorizations from the individual members of the group. Generally, try to get the group to announce the replacement to its membership, and have the group executives advise the former employer of discontinuance of its brokerage representation. The group executives may also be able to assist in mailing or providing data for mailing individual broker of record solicitations.

  1. Dealing With Markets.

Dealings with markets should be a joint project with the new employer. The employee should not discuss his specific move plans with markets until after the employee has left the former employer.

  1. Prior Employment Agreements and Stock Ownership.
    1. Employment or Other Contracts:

Any written agreements, which may be embodied in informal form, such as an exchange of letters between the employee and the former employer, should be supplied to you (and your counsel) for evaluation.
A contract cannot "create" a trade secret. A contract can, however, substantiate that the former employer has used reasonable efforts to maintain confidentiality, and that the employee (and his subsequent employer) has reason to know that use of the information is contrary to the wishes of the prior employer. If the information is in fact a trade secret, the contract will establish that its use is in violation of a duty owed by the employee to his former employer.

  1. Stock Ownership:

If the employee has or held a stock or ownership interest in the former employer's company, whether or not it was bought out and paid for when the employee left, the documentation for this must be supplied for evaluation. In this circumstance, the old employer's rights to restrict the employee's doing business may be significantly different than in normal employer-employee situations. The stock may, for example, have been acquired by the employee in exchange for a business he once owned, and he may be subject to valid and enforceable non-competition covenants arising out of the earlier transaction.

  1. A Few Things to Expect and Plan For.
    1. Defamation. Do not be surprised to hear that a lot of inaccurate things are being said about the employee or about you as the new employer. This kind of information will come to the employee generally through your customers. Anything of this type that is reported to the employee or to the company should be carefully noted in the charts or log of customer contacts, including when the employee learned of it, who told him, who made the inaccurate statements, and what their substance was.

      You, if you are like most new employers, do not want to start lawsuits. If, however, the former employer jumps into a defamatory mode, that conduct may constitute defense and counterclaim to any suit the former employer decides to bring. Do not engage in retaliatory "bad-mouthing" of the former employer.
    2. Pressure on Markets. If the former employer is a substantial production agency, do not be surprised to hear that pressure is being put on the carrier markets not to deal with you. Note and document as precisely as you can any information of this sort. It is not at all uncommon (unfortunately) for very large production houses to threaten their carriers in a variety of ways if they propose to do business with a former employee or his new employer. Pressures of this type are illegal, particularly in view of the fact that Proposition 103 has repealed the exemptions which the insurance industry formerly had from state antitrust laws.
    3. Litigation. If a lawsuit occurs, the typical case starts with an application for a temporary restraining order on notice that may be as short as a few hours, followed by a hearing 10 days later on a motion for preliminary injunction, with the litigation thereafter frequently dying from lack of interest (particularly if the former employer loses these preliminary skirmishes). The

relief sought is normally an order restraining or enjoining the employee from doing business with any of his or the former employer's customers or known prospects {12} .
The essential basis for any such lawsuit is normally a charge that the former employee has either (a) breached a specific written agreement with the former employer (which may or may not be enforceable, depending on the agreement and the circumstances); or (b) wrongfully misappropriated or used confidential information belonging to the former employer. Added claims are usually made based on intentional interference with prospective economic advantage; intentional inducement of clients to breach their contracts with the former employer; and breach of the employee's fiduciary obligations arising out of his employment.

  1. Pre-Litigation Preparation. Grab your lawyer the minute you hear that the former employer is or may be protesting your new employee's actual or expected conduct. Do not wait until a lawsuit is filed. This is the time when (a) you may be able to abort any threatened litigation; and/or (b) responsive papers to any likely lawsuit can be prepared.
  2. Aborting Litigation. If your program and bases are clear, you can transmit to the former employer exactly what you and your new employee have done and/or propose to do, demonstrating your good faith intentions to eschew any use of information that might be considered confidential. The details of your program as to how the employee will conduct himself, and how you communicate this to the former employer, should be worked out between you and your legal counsel. Your "leverage" is that if the former employer then brings suit, he may be responsible for paying your attorneys' fees. (See discussion below under Attorney's Fees.)
  3. Preparing Defenses. Applications for temporary restraining orders may be made on little or no notice. Evidence considered by the Court on such applications (and on applications for preliminary injunctions) is normally limited to written declarations subscribed under oath by percipient witnesses and parties.

A full and fair factual presentation of your position requires very careful preparation and drafting of the declarations which you and your new employee will present. Your lawyer needs time to do this properly, interviewing the declarants, preparing draft declarations for their review, and putting the declarations into final form for presentation to the Court.
Remember that the former employer has usually had advance time to prepare its papers; you need to present responses that demonstrate comparable time and thought.

In preparing responsive legal argument ("Points and Authorities"), your lawyer has to argue from the "facts" he presents to the Court and, when he refers to a "fact", he must have a sworn statement in a declaration from a witness to substantiate it. If these sworn statements are prepared in advance, preparation of a convincing legal argument is greatly facilitated.

  1. Attorney's Fees.

Recovery From Opposing Party. The California Trade Secrets Act allows the Court to award attorneys' fees against a plaintiff if a claim of misappropriation of trade secrets is made in bad faith, or if the plaintiff resists a motion to terminate a preliminary injunction in bad faith. Thus, if the procedures outlined are carefully followed, and the former employer is advised of this when first inquiry is made, the subsequent bringing of an action for misappropriation may be deemed to be in "bad faith," allowing the defendants to recover their attorney's fees in the action. (See "Aborting Litigation", page 13.)

  1. Indemnifying or Defending Your New Employee. California Labor Code §2802 gives an employee the right to full indemnity by his employer, including indemnity for legal costs when the employee is sued for actions taken as an employee {13} .

Many cases decided under Section 2802 have held that the right to indemnification includes payment of all legal fees and costs incurred by the employee in defending an action. The issue often arises where, because of likely conflicts of interest, the employee has to hire his own separate counsel. There are cases that hold it entirely proper for the same lawyer to defend both the employer and the employee, unless a conflict of interest exists or is likely. If this is contemplated, however, it is essential to obtain the employee's "informed consent" to joint representation.

What you want to maintain is "fair" competition. This means two principal goals are to be sought.
The first is that information which is truly confidential will, when generated, be so identified and will be maintained in confidence, and your employees are fully advised and aware of the importance of this in your priorities.
The second, which is rarely dealt with in the employment arrangements I have seen, is to give yourself an opportunity to compete fairly for retention of the business when an employee has decided to leave you.

  1. Generating and Maintaining Confidential Information.

Organize and code your client lists by special characteristics which you have discovered and which, if known, could have value to a competitor. Code the lists according to these characteristics. Characteristics would be items such as creditworthiness; bondability; co- operation in safety programs; housekeeping and maintenance; punctuality in paying premiums; types of coverages purchased; types of coverages for which subject is a potential or actual prospect; years of client patronage; preference for senior or younger personnel in dealings; preferences for male or female account representatives, etc. Label all such lists "CONFIDENTIAL - FOR INTERNAL USE ONLY."

  1. Maintain client contact information lists, designating the identities and personal characteristics of the principals with whom your company deals. Label all such lists "CONFIDENTIAL - FOR INTERNAL USE ONLY."
  2. In all cases, have a general "confidential information" agreement signed by all your employees. Include requirements that documents be returned, copies not made, etc. Include computer data maintained in office or at home.
  3. Bulletin all employees periodically, and make it a part of any new employee's manual, that you place the highest importance on maintenance of confidentiality, employee loyalty, and orderly transition of client service in the event an employee decides to leave you.
  4. Giving Yourself an Opportunity to Compete Fairly.
    1. Have employment agreements specifically provide for (1) advance notice by quitting employee; and (2) co-operation by employee in effecting transition of client responsibilities to others in your company. Set out ground rules for client contacts during this period, including rules for what will and will not be said.
    2. Provide that if employee quits without notice and without good cause, he will delay announcing his new location for the period which would have passed if he had given the required notice.
    3. Move as rapidly as possible, to set up appointments and introductions by which you can show the clients that you will be in a position fully and ably to continue to service their business. Call in your most presentable, and, if necessary, most senior executives to emphasize to the client the importance of his/her business.
    4. Do not make threats against or otherwise seek to intimidate your employee while he is still in your employ. If you have a confidentiality agreement with the employee, you can call it to his attention, but making threats about what you will do if he violates it can only backfire against you and prejudice your posture in any litigation. An atmosphere of threats and intimidation can justify your employee in quitting without further notice at a time when you may most need his help and co-operation.
  5. Evaluating Litigation.

You have to start by deciding whether you are willing to spend a lot of money trying to enjoin the employee from doing business with your clients, and whether you are willing to take the attendant risks (e.g. loss of good will of affected customers; loss of the lawsuit; payment of the other side's attorneys' fees; loss of time in preparing litigation and responding to discovery requests and deposition demands, etc.). Alternatively, you may decide to seek money damages only, based on business that is actually lost to you in spite of your best efforts to retain it. In the latter event, and if your employment contract so provides, arbitration proceedings may be available for resolution.
The basic rule here: Consult with experienced legal counsel. Bring to him all the information you have, including summaries of all the witness statements you think you can assemble. Try to obtain from counsel a full evaluation of (a) expected costs and fees; and (b) the probabilities of prevailing or settling.


{1} Exception: Nonsolicitation covenant will be enforceable if pursuant to sale by an owner/employee of his entire interest in the good will and assets or stock of a going business. See page 13, "Stock Ownership."
{2} Actual loss to prior entity; unjust enrichment of employee and/or new employer; ongoing "royalties" or participation in future revenues from business taken; punitive damages in "willful or malicious" cases, limited to two times actual damages; attorneys' fees in a variety of situations.
{3} American Credit Indem. Co. v. Sacks (App. 2 Dist. 1989) 262 Cal.Rptr. 92; 213 Cal.App. 3d 622.

{4} ABBA Rubber Co. v. Seaquist (App. 4 Dist. 1991) 286 Cal.Rptr.518; 235 Cal.App.3d 1
{5} Courtesy Temporary Services, Inc. v. Camacho (App. 2 Dist. 1990) 272 Cal.Rptr.352; 222 Cal.App.3d 1278.

{6} Section provides that everything an employee acquires by virtue of his employment, other than his wages, belongs to his employer, whether lawfully or unlawfully acquired, or during or after the period of employment. Many pre-Trade Secrets Act cases on soliciting former employer's customers have been decided under this section, and it still remains as a statutory basis for suit. Interpretations will, however, be largely controlled in future by the Trade Secrets Act.

{7} Section allows injunctions (but not damages), against "unfair competition." Cases have held that "unfair competition" is any business practice which offends an established public policy or which is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.
{8} For forms of announcements, see page 9 - 10.
{9} Note that the Court in the ABBA Rubber case regarded Courtesy as just another example of a specialized product situation, i.e. the information in the customer list showed those entities which had a propensity to purchase a product that was not purchased by most of the prospects for it, i.e. it was not generally known which employers actually used temporary help.

{10} Predatory action designed to injure a competitor can result in liability for the tort of intentional interference with prospective economic advantage. The defense to such a claim is competitive "justification," i.e. that the actions are lawful and are taken in furtherance of the defendant's own competitive economic interests. Where there is specific evidence of predatory intent, however, the "justification" defense can be severely undermined or defeated.
{11} Accord: Metro Traffic Control, Inc. v Shadow Traffic Network (1994) 22 Cal.App. 4th 853
{12} Information gained in the course of "prospecting" can constitute a protected trade secret, even if the prospect does not become a customer of the former employer. Damages for misappropriation of this information may be difficult to prove or nominal, but injunctive relief may still be granted.
{13} Section 2802 states:
An employer shall indemnify his employee for all that the employee necessarily expends or loses in direct consequence of the discharge of his duties as such, or of his obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying such directions, believed them to be unlawful.