25 Sep The Impact of the Mark Hurd Saga on California’s Ban on Covenants Not to Compete
California’s prohibition against covenants not to compete remains very strong, just not strong enough to stop companies from bringing a costly and very public trade secret misappropriation or wrongful disclosure law suit against a former employee. The case of Hewlett Packard (“HP”) vs. Mark Hurd, the former CEO of HP, has been front and center on the minds of many Silicon Valley executives and companies since it was filed three weeks ago. HP’s lawsuit alleged that Mr. Hurd put HP’s confidential trade secrets in “peril” by accepting a position with HP’s competitor, Oracle, Corporation (“Oracle”). The Complaint further alleged that Mr. Hurd neglected to provide HP with advance notice of his intent to join Oracle, and HP did not find out about his new position until it was reported in the press. The suit sought immediate injunctive relief to protect Mr. Hurds “threatened” misappropriation of trade secrets.
In plain speak, HP asked the court to stop Mr. Hurd from commencing his position with Oracle, or in the alternative to impose extremely onorous procedural hoops that Mr. Hurd and Oracle would have to go through in the event that he was to work with Oracle. HP’s lawsuit attempted to invoke the “inevitable disclosure doctrine”, a theory that was long ago rejected by California’s courts and legislature. Under that doctrine courts are asked to assume that employees who accept positions with their former employers’ competitors will inevitably breach the confidentiality of their former employers’ trade secrets, and therefore should be prohibited from accepting positions with all competitors of former employers. Contrary to the national trend to enforce non compete agreements; California’s courts and legislature have signaled that they generally more highly value an employee’s mobility and entrepreneurship than protectionist doctrine, per se. This is not to say that California courts will not hold employees liable for breaches of trade secret law, because they will when the evidence justifies such a finding. California courts will not, however, presume liability for violations of the law that have not yet occurred — where an ex-employer argues that its ex-employee will potentially, at some future point, reveal confidential trade secrets of the ex-employer to a new employer.
So where does this leave California employers seeking to hire qualified employees of their competitors, and employees seeking to move to positions with companies that compete with former employers? As stated above, there has been no change to California law as a result of HP v. Hurd. It is fair to say that California courts generally continue to favor employee mobility. In the world of public opinion, however, given that Mr. Hurd was reported by various newspapers and other media sources to have settled the case by surrendering considerable HP stock options that he would have retained had he not gone to Oracle (or another HP competitor), this case could have a chilling effect, at least in the near term, on movement of employees between companies. Whether or not HP ever would have prevailed on its claim against Mr. Hurd is secondary to the fact that unwanted publicity and legal expenses generated by the case would have been a tremendous distraction to Mr. Hurd as well as Oracle and HP until the case settled.
In light of HP’s lawsuit and the expedited settlement, we recommend that companies (and executives seeking to change positions) familiarize themselves with California trade secret, fair competition and employment laws as follows. Employees seeking to move to a position with a competitor, and companies seeking to hire such employees should be mindful of their obligations under California law not to use the trade secrets of former employers. An employer that knowingly employs a competitor’s former employee could be held liable for trade secret theft if it does not take appropriate precautionary actions. To protect themselves, employers who hire a competitor’s former employees should put in place protocols that require new hires to provide copies of all nondisclosure and confidentiality agreements (“NDA’s”) that were executed for former employers and then monitor those employees’ job duties to ensure that such persons are not involved in work that could violate those NDA’s. Ex-employers who are on the other side of the equation should also monitor the movement of their former employees who had access to confidential information. Once they know where their former employees are working, they should demand that the new employers honor their NDAs. They should also closely watch the business activities of the new employers so they can detect when breaches of confidentiality that warrant legal action may have occurred. Finally, employees who accept positions with competitors of former employers should be vigilant in their compliance with obligations under existing NDA’s, be careful not to inadvertently disclose or misappropriate trade secrets of a former employer, provide only minimum information (i.e., “new contact information”) to prior contacts when they change jobs, and avoid forming or being part of a competing business while still employed by the party with whom they intend to compete. As a practical matter, to the extent that the HP lawsuit could have been avoided had Mr. Hurd notified HP of his intent to join Oracle and spared HP the embarrassment of learning about his new position in the press, where circumstances allow employees are encouraged to take steps to minimize acrimony between them and their former employers.