Interference with a Contract or a Prospective Economic Advantage
Competing with another business is normal and accepted, so long as it is done legally. When someone knows of an existing contract and they intentionally disrupt the performance of that contract depriving one of the contractual parties of the benefits of the contract or causing the performance of the party’s obligations under the contract to be more costly or burdensome, such disruption could constitute interference with a contract. A primary difference between interference with a contract and interference with a prospective economic advantage is that in the later situation, a contract does not yet exist, but there is a likely prospect that a contract will be formed and the parties to the contract would benefit from that contract if the relationship was not disrupted.
The elements of the tort of interference with a contract are “(1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” (Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1126 [270 Cal.Rptr. 1, 791 P.2d 587], internal citations omitted.) See also the case of Buckaloo v. Johnson (1975) 14 Cal.3d 815 which explains the tort in the context of a real estate transaction. Interference can come in various forms, including through defamation or inducing litigation.
Many businesses, especially in Silicon Valley, are very protective of their trade secrets and confidential information. They often have new employees sign agreements requiring that the employee not disclose, use, or misappropriate any trade secret or confidential information during or after their employment. However, for these agreements to be legal in California, they generally cannot preclude an employee from working for a competitor. However, there are exceptions to the general rule.
In California, Business & Professions Code §16600, et seq., generally permits employees to work for an employer that competes with their prior employer so long as the employee does not misappropriate, disclose or use trade secrets belonging to their former employer.
Business & Professions Code §16600 provides: “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.”
There are a few exceptions to this general rule and special laws pertaining to partnerships, limited liability companies, certain corporations, the publication industry, telephone answering service and employment agencies.
Additionally, please note that use of a company’s confidential information, which may not be a trade secret, could be a violation of the Unfair Competition Law (Business & Professions Code §17200) since generally, everything an employee acquires by virtue of his or her employment belongs to the employer (Labor Code §2860).
An employee’s privacy is protected under various laws, including the California and U.S. Constitutions, the federal Health Insurance Portability and Accountability Act (“HIPAA”), California’s Confidentiality of Medical Information Act (CA Civil Code §56), and other laws. Some of the areas covered by privacy protection laws include, misuse of confidential information, intrusion into personal activities, medical examinations, drug testing, disclosure of medical information, and developing law regarding company computer/Internet/cell phone use.
In these privacy cases, the issues often involve the individual’s expectation of privacy and the employer’s justification or interests, along with potentially less invasive alternatives.
In addition to patent, copyright, and trademark protections for businesses, in Silicon Valley, throughout California, and in many other parts of the United States, protecting trade secrets is vital to a company’s success. Trade secrets can cover areas that may not normally be thought of as a trade secret, and can include information, including a formula, a pattern, a compilation, a program, a device, a method, a technique, or a process. Employers typically require employees to sign contracts where the employee agrees to keep their trade secrets confidential. This is a common method used to help protect the employer and to address §3426(a) and (d)(2) of the Uniform Trade Secrets Act.
California has adopted the Uniform Trade Secrets Act, which provides protection for companies against misappropriation of trade secrets. California’s Civil Code §3426 et seq. codifies the law that California uses. Some parts of the law are provided below, but this is only part of the law. The entire act is several code sections long, beginning with §3426. As with all of our codes or statutes, the courts have interpreted their meaning which can vary from a simple reading of the code.
3426.1. As used in this title, unless the context requires otherwise:
(a) “Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Reverse engineering or independent derivation alone shall not be considered improper means.
(b) “Misappropriation” means:
(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(2) Disclosure or use of a trade secret of another without express or implied consent by a person who:
(A) Used improper means to acquire knowledge of the trade secret; or
(B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:
(i) Derived from or through a person who had utilized improper means to acquire it;
(ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
(iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
(C) Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
(c) “Person” means a natural person, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.
(d) Trade secret” means 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.”
3426.2. (a) Actual or threatened misappropriation may be enjoined. Upon application to the court, an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.
(b) If the court determines that it would be unreasonable to prohibit future use, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time the use could have been prohibited.
(c) In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.
3426.3. (a) A complainant may recover damages for the actual loss caused by misappropriation. A complainant also may recover for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss.
(b) If neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty for no longer than the period of time the use could have been prohibited.
(c) If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subdivision (a) or (b).
3426.4. If a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable attorney’s fees and costs to the prevailing party. Recoverable costs hereunder shall include a reasonable sum to cover the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case by the prevailing party.
3426.5. In an action under this title, a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.
Employers and employees form contracts when they form the employment relationship. Typically they agree on the general duties that the employee will perform and the compensation that the employer will provide. Sometimes this is written in a letter offering employment that the employee signs to accept the position with the employer. Sometimes it is an oral agreement. It could be an implied agreement as well, which is reflected in the performance or actions of the employee and employer.
Either party, the employer or the employee, can breach the terms of the employment agreement in various ways. For example, an employee can breach the agreement by not reporting for work or not being productive. An employer can breach the agreement by not compensating the employee in the correct amount or at the agreed time.
Whenever an employment contract or any contract is breached, it usually makes sense to respectfully speak with the other party about the breach and dialogue about how to resolve the breach. If this is not successful, then mediation or other forms of dispute resolution can be used. The harmed party always has the option to sue the other party at any time, unless they wait too long and go beyond the statute of limitations (legal deadline for filing a lawsuit), or unless the parties have already agreed to a different method of dispute resolution such as arbitration and the dispute resolution agreement or arbitration agreement is enforceable.
Please note, assuming the contract is enforceable and the claim for breach of contract has merit and is not frivolous, generally, in California, the contract must contain an attorneys’ fee recovery provision for either party to have the right to recover their attorneys’ fees. California does not have an automatic recovery of attorney fees law for breach of contract when the contract is silent about recovering attorneys’ fees. (CA Code of Civil Procedure §1021)
Attorneys’ fees are recoverable in other types of claims as provided by statute related to the type of claim and in other situations. (Please see CA Code of Civil Procedure §1021.5 et seq.)
Please see “Lay-off, Reduction in Force, At-Will Employment” for the definition of “at-will” employment.
Sometimes contracts are not enforceable because they are determined to be unconscionable. Contacts can be procedurally and/or substantively unconscionable. One is procedurally unconscionable when at the time of its formation, one of the parties to the contract has a substantial advantage over the other party because they are in a more powerful position. For instance, an employer can have an advantage over an employee when an employee accepts a job because the employee is less sophisticated or less knowledgeable, and they have no alternatives but to accept a job with the conditions that the employer imposes. The employee would lack bargaining power. Substantive unconscionability exists when the terms of a contract are so one sided that they shock the conscious of a reasonable person. A contract can be deemed unconscionable, and therefore, unenforceable, if it is both procedurally and substantively unconscionable, but the degree of each type of unconscionability can vary.
Compensation plans for sales people can often involve commissions that are earned once certain duties are performed, but paid at a different time. To avoid disputes over how much is owed to an employee at any particular time or at termination of their employment, compensation plans should be made as clear and simple as possible identifying exactly when the sales person has completed their duties to earn a commission and under what conditions the commission will be paid. If the language is ambiguous or uncertain, the agreement could be construed in favor of the employee, as it is typically the employer who drafts the compensation plan and if that happens, the employer will have caused the uncertainty or ambiguity to occur. [Please see CA Civil Code §1654]
Employees and independent contractors can usually recover for the value of the services they rendered even if the terms of an employment or independent contractor agreement are not discernable.
Exempt v. Non-Exempt Employment
Employers often believe that if someone is paid a salary rather than hourly, that they are exempt from overtime, minimum wage, and other Labor Codes. However, whether they are truly exempt is based on several factors which can include the amount of compensation they are paid, their duties, and other factors. Under the federal Fair Labor Standards Act (“FLSA”) and the California Industrial Welfare Commission Orders there are several categories of employment that are exempt. The standard categories of exemption are:
1) Executive exemption -generally for managers and supervisors.
2) Administrative exemption – for certain types of administrative positions where the employee uses independent judgment and discretion in performing their duties.
3) Professional exemption – typically a licensed employee such as a doctor or attorney, but not necessarily.
Under the FLSA these other types of employees are exempt from overtime and minimum wage requirements: outside sales person, agricultural workers, computer system analysts, amusement park/recreational employees, newspaper business employees, switchboard operators, seamen, criminal investigators, baby-sitters and personal attendants.
California law has these other exemptions: outside salespersons, state and local government employees, computer software design and development, members of an employer’s family, employees licensed under the Fish & Game Code, live-in employees in substance abuse alternative housing, student nurses, and carnival ride operators. California also exempts certain inside sale commissioned employees if more than half of their compensation comes from commissions.
Other exceptions to the law exist other than those noted above and the general exempt categories noted above have very specific definitions.
The tests under the Fair Labor Standards Act are different than they are under California law. An employee may qualify as being exempt under one law but not under another. Therefore the exemption requirements must be met under both laws to truly be exempt.
Determining whether an employee is exempt or not under the FLSA or California law can be tricky, so this determination should be made by someone who is familiar with these laws.
Failure to properly classify an employee as exempt or not can be costly to an employer. They can be assessed serious penalties and be liable to employees for years of underpayment of wages.
Independent Contract v. Employment
In Silicon Valley and other places, entrepreneurial spirit is alive and well. Many businesses and individuals do business together under an independent contractor arrangement. Although both parties (the business and the individual) may be content with that arrangement, under various laws the individual may actually be an employee, rather than an independent contractor. If that is the case, the business (employer) could be liable for a significant amount in overtime pay (if the employee worked overtime hours), taxes, and penalties. The employee could be losing benefits to which they are entitled under the law, such as Workers’ Compensation insurance protection provided by the employer and overtime wages. This surprise can occur when an individual’s relationship with the business ends in a manner where the “independent contractor” is discontent or unhappy and explores claims against the business, discovering that they were actually an employee.
If a business or “independent contractor” is unsure about whether they have formed an enforceable independent contractor arrangement or an employment arrangement, they should see an employment law attorney to help them make that determination because the consequences of not complying with the law can be significant.
If an employee is non-exempt, they are entitled to a minimum hourly wage for their work under the federal Fair Labor Standards Act (“FLSA”) and California law. California’s minimum wage has been higher than the federal minimum wage. To see the latest minimum wage and an historic table of the minimum wages in California, please see the DLSE (Division of Labor Standards Enforcement) website or this link: http://www.dir.ca.gov/iwc/MinimumWageHistory.htm
Federal and California law requires the payment of prevailing wages on government contracts or public work. Contractors who secure this work generally must pay their employees minimum prevailing wages. In California, this law is found under Labor Code Labor Code §1770 et seq.
Private Attorney General Act – Labor Code §2698, §2699 et seq.
This 2004 law expanded the opportunity for employees to recover attorneys’ fees on many Labor Code violations and to recover a partial penalty as well, if the employee follows the protocol explained in the law. Heretofore, only select Labor Codes provided for recovery of a penalty for violation of the select codes. This law provides that an employer can be liable for a penalty if it violates one or more of many other codes that don’t have their own penalty provision. This law provides an incentive for employers to be careful about complying with the law. Here is the text of only a few parts of the fairly lengthy law.