Question #272: Competing in California

Question: One of our company’s employees recently left to start a competing business. We think he started this process while he was still employed by us, and that he is probably using information he learned from us.  We’re in California, so I know we don’t have a non-compete agreement with him.  Do we have any other recourse?

Answer: By Joel O’Malley and Scott Selix

Joel O'Malley

Joel O’Malley

Scott Selix

Scott Selix

Yes! Even in California, where non-compete agreements generally are not permitted, employees still may not compete against their current employers, and they cannot steal and use their employers’ confidential information and trade secrets.  A recent federal case out of Silicon Valley—Blackbird Technologies, Inc. v. Joshi—provides some examples of the things even a California employer can do when this happens.

Blackbird Technologies, Inc. is a California-based tech company that “provides visual semantic search, recommendation, personalization, and analytics for e-commerce companies.” We are not sure exactly what that means, but we think Blackbird helps internet search engines provide better and more responsive results from searches.  Blackbird’s primary asset was its highly confidential and proprietary software and source code.  Prateek Joshi was one of Blackbird’s software engineers in California, and he knew pretty much everything about Blackbird’s technology and business plans.

shutterstock_237498064Blackbird was a smart employer, though. It required Joshi (and other similar employees) to a sign a confidentiality agreement.  That agreement had Joshi agree not to engage in any activity competitive with Blackbird and not to disclose any of Blackbird’s proprietary information.  Joshi also agreed his confidentiality obligations extended even after his employment ended.

Despite Joshi’s agreement, during his Blackbird employment, he started forming a shutterstock_352803152competing business. He was foolish enough to register an internet domain name for his new company, as well as upload a video on YouTube describing his new company’s business.  One of his many mistakes was to include in the YouTube video discussions of the same technology he helped develop for Blackbird.

After Blackbird fired Joshi for poor performance and then discovered his wrongdoing, it sued him in California court seeking to enjoin him from further damage. Blackbird sued under the theory that Joshi owed Blackbird his undivided loyalty while he was employed by the company, but he breached that duty when he set in motion plans to start a new, competing business.  The court agreed.  It held first that Joshi owed Blackbird a duty of loyalty during his employment.  Quoting other court decisions, the court plainly stated, “During the term of employment, an employer is entitled to its employees’ undivided loyalty.”  Next, the court concluded Joshi breached this duty because his actions in preparation to start his own company were “inimical to the best interests” of Blackbird.  The court noted that Joshi “took actions ‘inimical’ to his former employer when he made significant progress toward organizing a competing business, in secret, while still a Blackbird employee, [and when he] started this new venture using confidential and proprietary information he had obtained from Blackbird.”

shutterstock_297646496The court also noted that in addition to his duty to be loyal to Blackbird, Joshi also had a duty not to use his position with Blackbird and his access to its property and confidential information to acquire material benefits for himself. This duty was triggered when it was discovered that Joshi, in the all-too-common practice of imprudent employees, downloaded Blackbird’s confidential information onto a thumb drive.  (It did not help Joshi that it took multiple court orders for him to produce the thumb drive.)

Joshi tried to defend his actions by arguing that California law permits employees to seek out new employment and even to make some preparations to compete before resigning. While that much is true, an employee is not allowed to “transfer his loyalty to a competitor,” which is what Joshi had done.

This case is good news for all employers, but especially those in California, where enforcing post-employment restrictions is a challenge. The case shows that even in the absence of a traditional non-compete agreement (or the law supporting such an agreement), employers can use the common law “duty of loyalty” and confidentiality agreements to stop employees from stealing away secrets and divulging them to a competitor.  What is additionally interesting about this case is the manner in which Blackbird enforced its rights.  Rather than asking the court to enjoin Joshi from working for his newly formed competitor business (which a California would be highly unlikely to do), Blackbird instead asked that Joshi stop using or disclosing Blackbird’s confidential information, including if done by selling services through the new company.  Blackbird got its injunction and effectively sent a message to Joshi and any other would-be disloyalists that the company would not stand for this sort of behavior.

Scott Selix

About Scott Selix

Scott is an associate in Dorsey’s Labor & Employment Group. His practice includes providing legal research and litigation support on a variety of employment issues. Scott also provides advice and......

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