Recent California Federal Court Decision Indicates That Determining Whether an Employment Agreement Illegally Restrains Lawful Employment Can Be a Fact-Intensive Inquiry Requiring Discovery

In a previous article that we published in October 2023, we detailed California’s forthcoming amendment to its noncompete law. That law, which is codified in California Business & Professions Code sections 16600 et seq, voids any contract “by which a person is restrained from engaging in a lawful profession, trade, or business of any kind.” In our prior article, we highlighted some of the practical implications of the amendment upon its scheduled effective date of January 1, 2024. Now, almost a year later, courts are grappling with applying the amended law and defining its bounds in lawsuits filed in California and elsewhere.

In a recent decision issued by the United States District Court for the Central District of California, a federal court in California was tasked with determining whether dismissal of a cause of action for tortious interference with contract at the outset of a case is appropriate where the underlying contract arguably contained restrictive covenants in violation of California Business & Professions Code section 16600.

Specifically, in the case NFP Prop. & Cas. Servs. v. Alliant Ins. Servs.[1], plaintiff NFP, a middle market insurance broker, filed a complaint asserting various claims — including a claim for tortious interference with contract — against Alliant (an alleged competitor). The complaint claimed that, among other things, Alliant intentionally induced breaches of employment agreements by encouraging NFP’s employees to resign without notice, violating their contracts’ 60-day notice requirement, and to misuse NFP’s confidential information to solicit NFP’s clients and employees for Alliant.

At the outset of the case, Alliant asserted its own counterclaims against NFP and also moved to dismiss the tortious interference claim, arguing that the restrictive covenants in NFP’s employment agreements are unenforceable under California’s Business and Professions Code section 16600. Alliant argued that NFP’s definition of “Confidential Information” in its contracts was overly broad and effectively transformed NFP’s post-employment restrictive covenants concerning customer and employee solicitation into illegal noncompetes under California law. Alliant identified specific provisions in NFP’s contracts that it argued were unenforceable, including clauses about non-disclosure, client and employee solicitation post-employment, and a 60-day notice requirement prior to resignation.

The court refused to find the specific provisions at issue illegal on their face and determined that evaluating whether these clauses unlawfully restrain trade requires detailed factual analysis and is better suited for summary judgment rather than dismissal at the pleading stage. Accordingly, the court denied Alliant’s motion to dismiss, thereby allowing NFP’s claim for tortious interference to proceed. Relying on an earlier federal decision, the court reasoned, “parties that have successfully challenged a contractual provision under § 16600 ordinarily have done so only after having submitted evidence clearly demonstrating enforcement of such provision would result in a prohibited restraint.”[2]

This court ruling demonstrates that determining whether an employment agreement is illegal and void under California’s noncompete law can be a fact-intensive inquiry that may require discovery — an oftentimes onerous and expensive phase of litigation that litigants loathe. Because California’s noncompete law provides that a prevailing employee, former employee, or prospective employee is entitled to recover reasonable attorney’s fees and costs if a lawsuit to void an illegal noncompete agreement is successful, former employees are naturally incentivized to file suit to void contract provisions that arguably restrain their right to engage in a lawful profession.

Given this new reality, employers looking to enforce confidentiality provisions post-employment and avoid expensive, drawn-out litigation with former employees should work with experienced counsel to thoroughly review and, if necessary, revise their employment agreements to ensure that the definition of “Confidential Information” is appropriately tailored to the employer’s business interests and also that any post-employment restrictions are not de facto noncompetes or nonsolicitation provisions in violation of California law.

If you are concerned about your legal rights in California with respect to former employees suspected of misappropriating confidential information to compete with your company, the authors of this article previously authored Protecting Trade Secrets In States That Disfavor Noncompetes, which covers best practices to protect against unfair competition by former employees, given California’s ever-changing legal landscape.

[1] 2024 U.S. Dist. LEXIS 192955, at *11-18 (C.D. Cal. Oct. 23, 2024)

[2] citing Proofpoint, Inc. v. Vade Secure, Inc., 2021 U.S. Dist. LEXIS 106709, 2021 WL 2308277, at *3 (N.D. Cal. June 4, 2021).