A recent decision out of California serves as a stark reminder for counsel to draft employee confidentiality contracts thoughtfully.
California, like many states, has a statute prohibiting “non-compete” contracts that unduly restrict an employee’s choice of work once she leaves a company. The statute reads: “Every contract… that restrains anyone… from engaging in a lawful profession, trade, or business of any kind is to that extent void.” To give a paradigmatic example, employment contracts can’t say “you’ll never work in this field again!” And to prevent end-runs around this point, an employer can’t disguise an invalid non-compete in the sheep’s clothing of a confidentiality clause. For example, a company generally couldn’t define “confidential information” to include any general industry knowledge that an employee learns during her former employment, and then prohibit the employee from using that knowledge in her later employment. That restriction would go beyond what’s needed to protect the former employee’s proprietary information, and it may effectively prevent the employee from practicing in the industry. A layperson might look at that sort of prohibition and say it’s “overboard”; a court would say it’s “overbroad.” It’d be a rare case in which a court would let an employer enforce that prohibition against a former employee without a showing that the employee was misusing some specific, proprietary, and material information.
The recent Brown v. TGS Management Company, LLC decision might seem, at first glance, to address a mere procedural point about how these non-compete disputes get litigated. The court held that when an employee contends that an overbroad confidentiality provision amounts to an improper non-compete, the employee can challenge the confidentiality provision “facially.” That means a court can consider the challenge without considering the “as applied” facts about how an employee has (or hasn’t) sought to use confidential information or whether the employer is seeking to enforce the confidentiality provision in an justifiable way. It wouldn’t matter that an employer were trying to use a broad confidentiality provision to achieve something reasonable, like preventing an employee’s outright theft of a trade secret. Instead, the California court held that a court should look straight at challenged provision and decide whether the provision, on its face, goes materially further than needed. If it’s overbroad and significantly restricts a former employee’s subsequent choice of work, it’s invalid, full stop.
For what it’s worth, this draconian result is hard to square with the statute’s text. To repeat, California’s non-compete reads: “Every contract… that restrains anyone… from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (Emphasis added.) So even if a contract goes too far in some respects, the courts should still enforce it in other respects. In other words, challenges to a non-compete should be as applied, rather than facial. But this textual point didn’t make its way into the court’s opinion.
Although this point seems procedural, it conceals an important substantive principle. If a confidentiality provision is materially overbroad, it may be in valid in its entirety. That risk is massively important to how companies structure their employee confidentiality provisions. The availability of facial challenges, and overbreadth challenges specifically, means that companies can’t write broad confidentiality provisions and then only seek to enforce them narrowly. Even if a company tries to enforce an overbroad confidentiality provision in a circumstances that everyone would agree are justifiable—such as the trade secret example discussed earlier—a court might throw out the entire confidentiality obligation. That means companies get one shot to write confidentiality agreements that are within the law. If they go overboard, they’re sunk.