Case Name: Friendfinder Networks, Inc. v. Mallorie Burak
Case No.: 16CV293579

This is an action for breach of contract. Currently before the Court is the demurrer by Defendant Mallorie Burak (“Defendant”) to Plaintiff’s second cause of action (Breach of Contract – Non-Solicitation) on the ground that it fails to state a cause of action against her because the contractual restriction is unlawful and unenforceable under Bus. & Prof. Code §16600.

For the reasons set forth below, the demurrer is SUSTAINED, without leave to amend.

The language at issue, part of employment agreements signed by Defendant Burak (presented in exhibits 2 and 3 to the Complaint) and allegedly incorporated into a separation agreement she signed, is found in Section 9 (“Interference with Business”) and states: “9.1 Executive shall not, for a period of one (1) year following termination of Executive’s employment with the Company for any reason, directly or indirectly solicit, induce, recruit, or encourage any officer, director or employee of the Company to leave the Company or terminate his or her employment with the Company.”

Bus. & Prof. Code §16600 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” “California courts have consistently declared this provision [§16600] an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice. Section 16600 has specifically been held to invalidate employment contracts which prohibit an employee from working for a competitor when the employment has terminated, unless necessary to protect the employer’s trade secrets. The corollary to this proposition is that competitors may solicit another’s employees if they do not use unlawful means or engage in acts of unfair competition.” (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859, internal citations omitted.) A former employee’s covenant not to compete with his/her former employer may be enforced only to the extent necessary to prevent unfair competition by the former employee: “In other words, it seems that the employer will be able to restrain by contract only that conduct of the former employee that would have been subject to judicial restraint under the law of unfair competition, absent the contract.” (Metro Traffic, supra, at 861, internal citations omitted. See also Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429 [antisolicitation covenants are void as unlawful business restraints except where enforcement is necessary to protect trade secrets.])

Defendant primarily relies on Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, a decision in which the California Supreme Court addressed a non-competition agreement which prohibited the employee from performing similar professional services for an 18-month period for any client on whose account he had worked on at the accounting firm and also prohibited the employee from soliciting any client of the firm for a year after termination. (Id. at 948.) The Court found this agreement invalid and took an expansive view of Bus. & Prof. Code §16600, ruling that the only exceptions to its bar on noncompetition agreements were those expressly stated in Bus. & Prof. Code §16601 (relating to the sale or dissolution of corporations); §16602 (sale or dissolution of partnerships) and §16602.5 (sale or dissolution of limited liability corporations). The Court expressly did not address “the so-called trade secret exception” or the language prohibiting recruitment of employees in the agreement before it. (Id. at 946, fn. 4.)

California courts will not reform an overbroad covenant not to compete. “Generally, courts reform contracts only where the parties have made a mistake, and not for the purpose of saving an illegal contract. Illegal contracts are void. . . . [T]he policy of [B&P Code §16600] would be undermined by doing so. Employers could insert broad, facially illegal covenants not to compete in their employment contracts. Many, perhaps most, employees would honor these clauses without consulting counsel or challenging the clause in court, thus directly undermining the statutory policy favoring competition. Employers would have no disincentive to use the broad, illegal clauses if permitted to retreat to a narrow, lawful construction in the event of litigation.” (Kolani v. Gluska (1998) 64 Cal.App.4th 402, 406-407, internal citations omitted.) Thus even where a contract provision has what might otherwise be a valid clause barring disclosure of trade secrets, the clause cannot be saved by reformation if the contract provision also contains clauses purporting to completely bar solicitation of customers or other employees after termination of employment because such clauses void the contract provision entirely.

Some earlier decisions held that a contract may prohibit employees, after termination of their employment, from soliciting their former co-workers to join a new business. (See Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, 280.) After the Supreme Court’s ruling in Edwards that all covenants not to compete that do not fall within one of the statutory exceptions are void, the continuing validity of these earlier decisions is questionable. But even under these earlier decisions employees could not be barred from hiring, as opposed to soliciting, their former co-workers. “Equity will not enjoin a former employee from receiving and considering applications from employees of his former employer, even though the circumstances be such that he should be enjoined from soliciting their applications.” (Loral, supra, at 279-280.) Moreover, under Kolani, if such a contract provision also contains an illegal covenant not to compete then the entire contract provision is void, including any otherwise legal terms. Courts will not reform or “blue pencil” such contracts because of the potential for chilling employees’ freedom of movement. (See D’Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 935, citing Kolani).

The Supreme Court in Edwards expressly rejected the approach taken by some federal courts in applying §16600 in such a way as to allow them to carve out enforceable contracts. (See Edwards, supra, at 947-950 [rejecting Ninth Circuit’s “narrow-restraint” interpretation of Bus. & Prof. Code §16600]; see also Dowell v. Pacesetter (2009) 179 Cal.App.4th 564, 576-579 [non-competition and non-solicitation clauses facially void under §16600; “Any attempt to construe the noncompete and non-solicitation clauses in such a way as to make them lawful would not be reforming the contract to correct a mistake of the parties but rather to save a statutorily proscribed and void provision.”]; Fillpoint LLC v. Maas (2012) 208 Cal.App.4th 1170, 1182 [non-solicitation agreement inconsistent with §16600 unenforceable]; Wanke, Industrial, Commercial, Residential v. Keck (2012) 209 Cal.App.4th 1151, 1177 [following Edwards, §16600 prohibits enforcement of non-solicitation agreement in all cases where trade secret exception does not apply].)

Defendant’s demurrer to the second cause of action is SUSTAINED. Any claim for breach of contract must be based on a valid contract, and Defendant is correct that the non-solicitation provision of the contracts she signed while employed by Plaintiff is invalid under Edwards. The language in question cannot reasonably be construed as a measure for the protection of trade secrets (which are addressed in a different section of the agreement, Section 8, which is purportedly binding “in perpetuity” rather than for one year after termination). The language is question is also clearly overbroad and ambiguous (how exactly does a former employee “indirectly” “encourage” or “recruit” his/her former colleagues?) and would be invalid even if Loral still represented the current state of California law (which it does not). It is not surprising that the opposition is unable to cite a single California decision handed down post-Edwards to support Plaintiff’s position that the provision is enforceable as written.

Leave to amend is DENIED as the defect cannot be cured. The non-solicitation provision is void as a matter of law and cannot be the basis for a breach of contract claim. To allow any reformation of the Section 9.1 language would undermine Bus. & Prof. Code §16600 as described by the court in Kolani: “Employers could insert broad, facially illegal covenants not to compete in their employment contracts. Many, perhaps most, employees would honor these clauses without consulting counsel or challenging the clause in court, thus directly undermining the statutory policy favoring competition. Employers would have no disincentive to use the broad, illegal clauses if permitted to retreat to a narrow, lawful construction in the event of litigation.” (64 Cal.App.4th at 407.)