ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Tuesday, July 28, 2020

“Trade Secret” as an End Run Around Non-Compete and Non-Solicitation Restrictions?

Tesla recently sued its competitor, Rivian, claiming that Rivian was poaching its former employees and encouraging them to misappropriate Tesla’s trade secrets.  What struck me was that many of the alleged trade secret misappropriation claims in the complaint (available here ) involved information relating recruitment and retention efforts, including compensation.  Tesla’s employees sign an NDA that requires them not to disclose Tesla’s “Proprietary Information” which is defined rather broadly to include “all information, in whatever form and format, to which have access by virtue of and in the course of" employment and encompassing, “technical data, trade secrets, know-how,…plans, designs,. .. methods, processes, data, programs, lists of or information relating to, employees, suppliers…financial information and other business information.” 

Note that the definition of “proprietary information” is greater than “trade secret” so that the employee’s contractual obligation is greater than it would otherwise be under trade secret law alone.  Perhaps not surprisingly, Tesla filed breach of contract claims against the individual defendants (the former Tesla employees) as well as an intentional interference of contract claim against Rivian.

In a case involving Fidelity, a former employee left Fidelity to join Merrill Lynch.  The employee allegedly took information regarding customer accounts and also contacted Fidelity clients and tried to solicit their business. That employee’s contract included a non-solicitation clause that stated that he would not “directly or indirectly … solicit in any manner or induce or attempt to induce any customer or prospective customer with whom Employee had personal contact or about whom Employee otherwise learned during the course of the Employee’s employment with the Fidelity Companies.”

In both cases, the alleged trade secrets involved information that could be referred to as relational and closely tied to the services side of the business, rather than the product development or technical side.  The Tesla employment contracts are governed by California law which essentially finds non-compete and non-solicitation clauses unenforceable.  The Fidelity contract, on the other hand, was governed by Georgia law which permits non-solicitation clauses if they are reasonable (i.e. if the employee had worked with the client while employed at Fidelity) but takes a tougher stance on non-compete clauses (although not as tough as California).

These two situations led me to wonder whether companies are using confidentiality clauses in their employment agreements as a way to achieve the same result as a non-compete and/or non-solicitation clause.  As states have increasingly restricted or, in the case of California, essentially prohibited the enforceability of non-compete clauses and non-solicitation clauses, companies seem to be increasingly leaning on trade secret law and confidentiality clauses in employment agreements to keep their former employees from joining competitors.

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