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Restrictions on Making Sales to Former Customers

By Peter Attarian

A salesperson quits or is fired and goes to work for a competing company. May he call on and make sales to the same clients he had contact with at his prior employment? Stated differently, may an employer prevent a former employee from calling on its customers? The answer to both of these questions: maybe.

This is one of those "gray" areas of the law where there are many guidelines but no quick or easy answers. Courts struggle with these cases and often reach inconsistent and contradictory results because the competing policies are so difficult to reconcile. Ultimately, the result in any particular case will be heavily dependant on the facts and whether the conduct at issue was fair and reasonable under the circumstances.

Unlike many other states, in California the general rule is that covenants not to compete are unenforceable unless they are part of a transaction involving the sale of a business. California courts will enforce non-compete provisions against the seller of a business where the provisions are reasonably limited in time and scope.

Many employers require their employees to sign confidentiality agreements containing some form of a covenant not to compete. The confidentiality component will typically provide that the employee may only use or disclose the employer's confidential information in the course of the employee's work for the employer. The non-compete clause may state that after termination of employment, the employee may not solicit business from clients the employee had contact with while working for the employer.

A predominant policy in California is that of free enterprise, which is fostered by encouraging vigorous competition. California courts typically will not want to order a salesperson not to call on certain customers because doing so directly impacts his ability to earn a living.

On the other hand, an employer is often very troubled when it learns that its former salesperson is working for a competing company and making sales to customers of the previous employer. After all, the salesperson developed these client contacts while working for his former employer at the expense of that employer. He may even have signed an agreement that expressly restricts his ability to call on his former employer's customers.

Thus, a competing policy is an employer's right to protect its financial interest in its customer base, which was generated at the expense of the employer. Related to this policy is the employer's need to safeguard confidential information and trade secrets.

Customer Lists As "Trade Secrets"

To many, the term "trade secrets" suggests something like the secret formula for a soft drink or technical specifications for a product. However, the legal definition of what constitutes a trade secret is much broader and is contained in California Civil Code section 3426.1. A trade secret is "information," including a formula, pattern, compilation, program, device, method, technique or process that:

1. Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
   
   
2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

A customer list is a compilation of names, addresses and information concerning a company's clients. It need not be in writing but may be in an employee's memory. The more difficult and expensive to obtain customer information, and the more particularized the information, the more likely a court will find a customer list to be a trade secret. If an employer's customer list is in fact a trade secret, and a salesperson calls on his former employer's clients, he could be liable to his former employer for "misappropriation" of trade secrets.

California courts have held that customer lists of commercial roof repair customers, companies that purchase rubber rollers and businesses that use services of temporary help agencies may be trade secrets. In contrast, other courts of this State have held that customer lists of clients of an accounting firm and companies that purchase packaging materials were not trade secrets.

An employer may have various types of confidential information in written form or on computer. A password may be required to access computer data, and certain paperwork and files may be available only to particular employees. Yet, confidentiality by itself does not create a trade secret. Maintaining confidentiality of a customer list is just one element of establishing that the list is a trade secret.

The final determination as to whether a particular customer list is a trade secret will depend in large part on the parties' conduct, the equities of the situation and the answers to the following types of questions:

1. Did the employee sign an agreement promising not to call on customers after termination of employment, and if so, what are its terms?
   
   
2. To what extent did the employer make efforts to keep customer information confidential?
   
   
3. What information is part of the customer list in addition to the identity of customers, i.e., names of contact persons, special purchasing requirements, pricing data, etc.?
   
   
4. What did the employee do to prepare for his new employment before termination from his previous job?
   
   
5. In calling on customers, did the salesperson merely announce his new employment, or did he aggressively solicit customers of his prior employer?
   
   
6. What written or computerized materials relating to customers from his prior employment did the employee keep?

By implementing appropriate policies and procedures, an employer may significantly strengthen its position in restricting a former salesperson from calling on the employer's customers. Among other things, an employer should consider requiring all employees to sign confidentiality agreements and establishing procedures for maintaining confidentiality of customer lists. In addition, any non-compete clause must be very narrowly drawn in order for a California court to enforce such a provision. Even then, there is no guarantee that the provision will be enforceable if there is no trade secret involved.

Employers must beware of California's very clear and strong public policy against non-compete agreements. Indeed, an employer may even be subject to liability if it requires employees to sign an invalid or overly broad covenant not to compete.

This article provides some guidelines and suggestions but is not intended as legal advice. If legal advice or representation is necessary, an attorney should be consulted. Peter Attarian is an attorney at the law firm of Blackmar, Principe & Schmelter, A.P.C. in San Diego and may be reached at (619)238-8900 or pattarian@bpslaw.net.