Competition from Ex-Employees

One of my ex-employees just started a new company to compete with my startup. My lawyer said I could not insert a noncompete in his employment agreement since we are located in California. Now my ex-employee is using all the knowledge I taught him against me. Other than just never do business in California again, is there anything I can do?

First, there are many compelling reasons why doing business in California is excruciatingly painful, but I do not believe the prohibition against noncompetition clauses is one of them. Indeed, California’s long-standing prohibition on post-employment restrictions against competition is one of the primary reasons why Silicon Valley is located in California instead of, say, Boston or any number of other areas of the United States which were once likelier candidates. From the Shockley Semiconductor “Traitorous Eight” onward, innovation has flourished because employees could move on and use their knowledge freely, even against their old employers.

There are nuances to California Business and Professions Code Section 16600 — and important exceptions which I will not cover here — but the legal trend is to make the prohibition more expansive and to cause more pain to employers who flout the rules.

That said, you are not bereft of remedies. Section 16600 does not give any ex-employee the right to use valid trade secrets and infringe intellectual property rights, like patents and copyrights. Presumably, your company also has each employee sign a proprietary information and invention assignment agreement, which makes clear your ex-employee’s obligations regarding intellectual property developed while employed by you.

In fact, trade secret and intellectual property infringement cases are almost always massively expensive and destructive to a defendant, running into the hundreds of thousands of dollars (and more) of legal expenses. Further, no investor wants to invest money into paying these fees instead of growing the business, or risk building a company whose business may be shut down with an injunction and damage award. The fact of trade secret or IP litigation often strangles an infant startup in the crib.

The tools are powerful, but are not always used justly. I have seen dozens of frivolous trade secret and IP cases in my years, calculated not to correcting injustice, but merely to inflict ruination on an ex-employee. On the other hand, I have been an executive of a company where employees legitimately stole trade secrets, even resulting in federal felony indictments. And basically got away with it because the legal system abjectly failed.

So, you have remedies. The real question is whether there is actual injustice. Do you have legitimate trade secrets? (You have to do this analysis deeply, as trade secret claims are easy to defeat.) Do you have documented patentable inventions, applications, or issued patents? Is the ex-employee using any of these rights? Did he take anything with him he should not have, like downloads of documents and thumb drives of data? Can he easily just design around your inventions and trade secrets with something else?

(If you are on the other side of this question, as the ex-employee, please review the lessons where we discuss clean rooms and designing around former employer intellectual property.)

In the end, you can probably ruin this person’s new business for the right amount of money, but are you ultimately better just ignoring him and investing the money in your own innovation? And do you want to make a lifelong enemy of someone who might just fail on their own?

See also: 3.103: Founders and Early Talent

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