Source: https://casetext.com/case/hollingsworth-solderless-terminal-v-turley
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Matched Legal Cases: ['§ 17043', '§ 2860', '§ 396', '§ 16600', '§ 16600', '§ 17043']

Hollingsworth Solderless Terminal v. Turley, 622 F.2d 1324 | Casetext Search + Citator
Hollingsworth Solderless Terminal v. Turley
a. Hollingsworth Analysis Before proceeding to the four-part trade secret misappropriation test set forth…
Medtronic, Inc. v. Gibbons
Gibbons first argues that the district court erred in refusing to apply California substantive law to…
Full title:HOLLINGSWORTH SOLDERLESS TERMINAL CO., A CORPORATION, PLAINTIFF-APPELLANT…
Date published: Jun 2, 1980
622 F.2d 1324 (9th Cir. 1980)
concluding "a person is not always free to solicit customers of a former employer or to use information acquired during his former employment"
Summary of this case from Warner and Company v. Solberg
Before SNEED and KENNEDY, Circuit Judges, and KRAFT, District Judge.
Honorable C. William Kraft, Jr., Senior United States District Judge for the District of Pennsylvania, sitting by designation.
This diversity action principally concerns the circumstances in which California law permits a salesman who leaves his employer to solicit the employer's customers by using various kinds of information acquired in his first position. Plaintiff-appellant Hollingsworth Solderless Terminal Company competes, in California and nationwide, with defendant-appellee Hoffman Electronics Corporation. Hoffman hired a former Hollingsworth then sued both Hoffman and the salesman, defendant-appellee William Turley. After some discovery, all parties filed for summary judgment and Hollingsworth moved for a preliminary injunction. The trial court ruled against Hollingsworth on all aspects of the case, and Hollingsworth now appeals.
At Hollingsworth, Turley acquired information concerning various aspects of his employer's operations. According to plaintiff, this information included: identities of customers, names of buying influences (agents) and their particular methods of doing business, particular requirements and characteristics of the customer, quantities of goods purchased and dates of purchases, prices charged, discount arrangements given to some customers, and dates of calls upon the customers. Hollingsworth required salesmen to write down all relevant information regarding customers. According to Hollingsworth, through these and other efforts involving substantial amounts of time, effort, and money, it was able to develop a detailed customer information file. Salesmen were also given copies of invoices which reflected the actual prices charged to customers and the discount arrangement, indicated in a confidential code, given to that particular customer. At least one reason for this practice was to verify the accuracy of the data for purposes of paying salesmen their commission. According to Hollingsworth, salesmen were required to return these invoices to the company. Turley, like other salesmen, kept customer information on 3 X 5 cards.
According to plaintiff, 20% of its customers accounted for about 80% of its business. As the record indicates, other customers were given various discount arrangements. The term "preferred" is used by Hollingsworth to refer to customers who bought more than $100 of Hollingsworth products per year.
Three years after Turley began work for Hollingsworth, he signed a document entitled "Employee's Restrictive Covenants." The agreement required that the information described above be kept confidential, that upon termination of employment the lists were to be returned, and that Turley would refrain from soliciting Hollingsworth's customers for one year. The document recited that in consideration for these promises, Turley was to receive future employment, prospective assignments to work on confidential matters, and one dollar, and stated that Hollingsworth was reluctant to continue to employ Turley unless he signed the restrictive covenant. A notary's seal appeared next to Turley's signature at the end of the document and the word "Seal" appeared in brackets next to Turley's name. The agreement stated that it was to be construed under Pennsylvania law.
Turley promised to "deliver and return to [Hollingsworth] all lists of customers . . . [and] price lists" upon termination of employment and to refrain from "directly or indirectly, compet[ing] with [Hollingsworth] or solicit[ing] or accept[ing] business (with respect to products or services competitive with those of [Hollingsworth] from any of Hollingsworth's customers whom [Turley] knew, became acquainted with, called upon or had any contact with prior to the termination of employment." The agreement also required Turley to "keep confidential during and subsequent to the period of . . . employment . . . all information relating to [Hollingsworth's] business, . . . trade secrets, [and] its sources of supply or lists of customers. . . ."
Turley resigned from his position with Hollingsworth in 1974. He turned in some of the cards but retained many of them together with invoices, printouts listing sales volume, and other documents. After attempting to make a living for about three months in an unrelated filed, Turley was hired by Hoffman as a salesman. Either shortly before or after hiring Turley, Hoffman was informed of the "Employee's Restrictive Covenants" which Turley had signed. Turley was nevertheless assigned to a territory he had worked for Hollingsworth. He called upon many of his former accounts and obtained business from several of them.
At a deposition in connection with this lawsuit, Turley apparently returned a box of 3 X 5 cards.
In 1973 Hoffman had hired two other former Hollingsworth salesmen, J. Donald Reed and Warren Smith. These two men were contacted by Hoffman while they were still employed by Hollingsworth. Both of them had signed restrictive covenants with Hollingsworth and both were eventually assigned by Hoffman to sales territories which included areas they had serviced while employed by Hollingsworth. One of the men, while still employed by Hollingsworth, discussed with Hoffman officials the volume of Hollingsworth's sales and furnished Hoffman with invoices showing the prices charged some of Hollingsworth's larger customers and prospects.
Hoffman asserts this information confirmed what it already knew from other sources or was not useful in competing with Hollingsworth.
Hollingsworth's action alleged: (1) Turley and Hoffman were liable in tort for unfair competition based on Turley's solicitation of Hollingsworth customers and use of confidential information; (2) Turley and Hoffman induced Hollingsworth's customers to breach their contracts with Hollingsworth; (3) Hoffman engaged in unfair competition by soliciting Hollingsworth employees in order obtain confidential information; (4) Turley breached the restrictive covenant he had signed while employed with Hollingsworth; and (5) Hoffman sold its products below cost for the purpose of stifling competition in violation of Cal.Bus. Prof.Code § 17043 (West 1964). The district court granted defendants' motion for summary judgment and denied plaintiff's motion for a preliminary injunction.
The court held, among other things: "Any and all information acquired by Hoffman from [Turley] relating to Hollingsworth's business and customers is not confidential, proprietary or a trade secret of Hollingsworth." Among the district court's Findings of Fact were the following:
The law of California controls at least the tort aspects of Hollingsworth's claims, but the many California precedents do not provide clear standards for decision of this case. See generally Hays, The California Law of Unfair Competition Takes a Turn — Against the Employer, 41 Calif.L.Rev. 38 (1953); Hays, Unfair Competition — Another Decade, 51 Calif.L.Rev. 51 (1963).
Equity will to the fullest extent protect the property rights of employers in their trade secrets and otherwise, but public policy and natural justice require that equity should . . . be solicitous for the right inherent in all people, not fetered by negative covenants upon their part to the contrary to follow any of the common occupations of life. . . . A former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted.
Id. at 202, 188 P.2d at 306. This statement was substantially adopted by the California Supreme Court in Aetna Bldg. Maintenance Co. v. West, 39 Cal.2d 198, 204-05, 246 P.2d 11, 15 (1952). Underlying it is a concern with the confidential nature of the information in question. Following the above passage, sage, the court in California Intelligence Bureau stated: "The fundamental [test] is whether in a given case the knowledge gained by an employee is secret and confidential." 83 Cal.App.2d at 203, 188 P.2d at 306. The importance of confidentiality has been reaffirmed in subsequent cases. See, e. g., Klamath-Orleans Lumber, Inc. v. Miller, 87 Cal.App.2d 458, 464, 151 Cal. Rptr 118, 120 (1978); Greenly v. Cooper, 77 Cal.App.3d 382, 391, 143 Cal.Rptr. 514, 520-21 (1978); King v. Pacific Vitamin Corp., 256 Cal.App.2d 841, 845, 64 Cal.Rptr. 486, 487 (1967); American Loan Corp. v. California Commercial Corp., 211 Cal.App.2d 515, 522-23, 27 Cal.Rptr. 243, 246-47 (1963); Alex Foods, Inc. v. Metcalfe, 137 Cal.App.2d 415, 426-27, 290 P.2d 646, 653-54 (1955). Although in most instances where information will be protectible as a trade secret all five of the circumstances described by the court in Aetna will be present, we think California law is best viewed as not requiring a plaintiff to prove all five to prevail. See Klamath-Orleans, supra, 87 Cal.App.3d at 464, 151 Cal.Rptr. at 120; Greenly, supra, 77 Cal.App.3d at 392 n.2, 143 Cal.Rptr. at 520 n.2; Hays, supra, 41 Calif.L.Rev. at 50-59; Hays, supra, 41 Calif.L.Rev. at 68-69. See also Alex Foods, supra, 137 Cal.App.2d at 426-27, 290 P.2d at 653-54; Gloria Ice Cream Milk Co. v. Cowan, 2 Cal.2d 460, 41 P.2d 340 (1935) (identity of customers not secret, but injunction granted because of defendant's intent to injure plaintiff's business).
1. "[T]he business of serving the customer is based upon regular calls at definite periods, establishing a business relationship between the customer and the company, which, unless interfered with, normally will continue. . . . Each sale is a distinct transaction, not necessarily implying that another will follow."
2. "[T]he services rendered or the products sold [are] essentially the same, and the quality of the service rendered is similar. In the case of a salesman in a commercial field, there is no assurance of an order unless he can satisfy the customer that his merchandise is better, cheaper or more salable than that of his competitor."
While the considerations which can support a finding that information is protectible may appear most often in businesses where personal services are provided or the salesmen follow a delivery route, the same principles are applicable whether or not a delivery route is involved. See American Loan Corp., supra; State Farm Mut. Auto. Ins. Co. v. Dempster, 174 Cal.App.2d 418, 344 P.2d 821 (1959); Reid v. Mass. Co., 155 Cal.App.2d 293, 301, 318 P.2d 54, 60 (1957); Alex Foods, supra; California Intelligence Bureau, supra. A rule which focused on whether the employee was a delivery route salesman or a commercial salesman would distort analysis of the relevant considerations.
(1) Perhaps the most important consideration is whether the information is readily accessible to a reasonably diligent competitor or salesman. See, e. g., Klamath-Orleans, supra, 87 Cal.App.3d at 464-65, 151 Cal.Rptr. at 121; Fortna v. Martin, 158 Cal.App.2d 634, 639-40, 323 P.2d 146, 149 (1958); American Alloy Steel Corp. v. Ross, 149 Cal.App.2d 215, 219-20, 308 P.2d 494, 497 (1957); Alex Foods, supra, 137 Cal.App.2d at 425, 428, 290 P.2d at 653, 654-55. Finding that information is readily accessible to competitors indicates the plaintiff did not reasonably spend a great deal of time or effort compiling the information, cf. Klamath-Orleans, supra, that the plaintiff suffers no injury when a former employee uses the information since he or his new employer could easily discover it from other sources, and perhaps that the plaintiff and defendant are competing in an open market for commonly known customers. Where the plaintiff competes with other businesses for a customer's patronage, one can infer the identity of that customer is common knowledge in the trade, see Mathews Paint Co. v. Seaside Paint and Lacquer Co., 148 Cal.App.2d 168, 306 P.2d 113 (1957); Alex Foods, supra; Avocado Sales Co. v. Wyse, 122 Cal.App. 627, 10 P.2d 485 (1932); evidence showing that a customer of the plaintiff had not been contacted in the past by competitors might support a contrary inference.
Strictly speaking, it is probably not essential for the employer to demonstrate that the customer information was developed principally by its efforts, as opposed to the employee's independent efforts, in order to prevent the employee from using the information in a subsequent employment. See Cal.Labor Code § 2860 (West 1971); Reid, supra, 155 Cal.App.2d at 293, 318 P.2d at 60. On the other hand, in many of the cases which have found information confidential one factor considered was whether it was largely the employer's time and efforts that produced the valuable information the employee was then attempting to use. See, e. g., Klamath-Orleans, supra; Greenly, supra; King, supra.
Where customer lists are involved, the fact of ready accessibility is often inferred from evidence concerning whether the information is available in public directories such as telephone directories or more specialized trade directories. See, e.g., Fortna, supra; Mathews Paint Co., supra. Even if the names of plaintiff's customers appear in a public directory, however, those names may appear among the names of many other business which may be neither actual nor even potential customers of the plaintiff. Hence, it may be costly to parse from such a directory potentially profitable customers from entries not worth pursuing, see Klamath-Orleans, supra. This might be most true of a directory, such as a telephone book, which included diverse entries. Evidence concerning whether a reasonably diligent salesman could perceive a narrowing classification which reduces substantially the costs of identifying potential customers is thus relevant to determining accessibility. Indeed, if a high percentage of businesses contacted by a salesman while working for a new employer are the ones he serviced for a former employer, this may be evidence that solicitation of customers through public sources involves some additional costs. See American Loan Corp., supra, 211 Cal.App.2d at 523, 27 Cal.Rptr. at 248.
A list of plaintiff's customers may be a secret even when the general class of potential customers in obvious and readily accessible. In Reid, supra, for example, the court stated:
Defendants argue that the information concerning plaintiff's customers was not confidential since no lists were furnished to the salesmen and since each salesman used obvious methods in choosing prospective customers — telephone directory, newspaper, driving through a town and picking the best looking stores, et cetera. However, these sources would not disclose the persons who ultimately made up the list of plaintiffs' customers. Some of the merchants approached by plaintiffs' salesmen declined to purchase this type of advertising. It was the list of persons who did purchase plaintiffs' services that constituted confidential information.
155 Cal.App.2d at 301-02, 318 P.2d at 60. See also California Intelligence Bureau, supra. In Reid and California Intelligence Bureau the courts emphasis on the obviousness of actual customers (and not potential customers) can be explained by the desire to protect the substantial effort of the plaintiff in creating a market for the relatively unique services or products offered. An additional possibility, however, is that a list of people who have already purchased a product is substantially more valuable than a list of people who only might be interested in purchasing the product. Such a showing, together with other facts, might justify an inference that the names of plaintiff's actual customers are protectible trade secrets.
Further, at least one court has affirmed a finding that customer information was not readily accessible information when, "although the identity of some of plaintiff's customers may have been easily ascertainable by competitors, it cannot be said that the entire — or even a majority — of the customers scattered throughout the nation were readily accessible to defendants here." Klamath-Orleans, supra, 87 Cal.App.3d at 464-65, 151 Cal.Rptr. at 121.
A finding of confidentiality may be proper, even if the customers' names are well known, if their special characteristics are important to the seller and not obvious. The plaintiff in Greenly, supra, was a mortgage loan broker. The court, noting that the customer list of home loan investors "contain[ed] other valuable information, e. g., areas in which a customer will or will not invest, the maximum amount of investment, and loan expiration dates (enabling one to solicit the customer for additional business when the loan expires)." at 77 Cal.App.2d at 392, 143 Cal.Rptr. at 521, affirmed a finding that the information contained on the list was confidential. Compare, e. g., Mathews Paint Co., supra Fortna, supra (characteristics of buyers, their special needs, and names of purchasing influences are obvious and could be determined by any prudent salesman calling on the company).
Finally, if the class of potential customers is common knowledge, protection of the information may be justified because of other considerations. In the core cases on delivery routes, where protection is given to customer lists, the names of potential users of milk or linen services are obvious; one need only consult a street directory or knock on the doors or people's homes. The facts that a person's or business' name appears in a public directory and that some identifiable subgroup in that list exists which could reasonably be identified as possible users of a product do not as a matter of law require a finding that a business' list of such customers is unprotectible. See generally Hays, supra, 51 Calif.L.Rev. at 52 ("The common denominator in these service cases is that although the identities and locations of the customers may be freely ascertainable, they are numerous and usually scattered, and it takes a substantial amount of time, effort, and expense to obtain these customers initially"). Other factors, to which we now turn, may justify relief.
The intent of the employer that information remain confidential is not a controlling consideration under California law, but information which the employer considers secret is more likely to receive protection. Evidence that, for example, the employer required its salesmen to sign a confidentiality agreement is thus relevant to determining whether the information is protectible. See Hays, supra, 51 Calif.L.Rev. at 69-70.
(2) Another relevant consideration is whether the customer's decision to purchase is influenced primarily by considerations such as price, quality, reliable delivery, and efficient service, as contrasted with considerations such as special needs or susceptibilities of which the employee or employer, through some effort, has knowledge. See, e. g., Continental Car-Na-Var Corp., supra, 24 Cal.2d at 109, 111, 148 P.2d at 12, 13; Aetna, supra, 39 Cal.2d at 205-06, 246 P.2d at 16. This consideration appears to be a foundation for the delivery route cases, since as we have noted, the identities of customers in many of the delivery route cases appears readily accessible to competitors. Where the former considerations influence the customer, the plaintiff is normally not prejudiced when a former employee solicits the same customers, since the customer is not as concerned with the identity of the salesman. See Aetna, supra, 39 Cal.2d at 205, 246 P.2d at 16. Where price, quality, delivery and service of competing products are comparable, perhaps one may infer that a customer's purchasing decisions are influenced to a greater extent by other considerations, and thus the former employee's solicitation unfairly prejudices the plaintiff.
The reasons for inferring prejudice to the employer are absent where the special needs or characteristics of a customer can be readily ascertained, since presumably any prudent competitor calling on the customer could discover the same information.
An allied inquiry was identified by the court in Aetna as whether "the established business relationship between the customer and the former employer would normally continue unless interfered with." 39 Cal.2d at 205, 246 P.2d at 15. In addition to the considerations discussed in the preceding paragraph, evidence that the plaintiff has been doing business over a period of time with a customer, that the customer has not been contacted in the past by competitors, or that even if contacted the customer continues to satisfy its requirements from the plaintiff, are facts which might justify an inference that the plaintiff's relationship with the customer normally would continue unless interfered with. Of course, absent some unfair practice, a business may not prohibit competitors from attempting to do business with its customers. See, e.g., Continental Car-Na-Var Corp., supra. Proving a stable and continuous relationship with a customer, however, strengthens the inference that the plaintiff is injured by the former employee's solicitation.
A further consideration is whether, in addition to manifesting an intent to take business away from the plaintiff, the salesman or competitors has a purpose to injure the plaintiff's business. See, e. g., Gloria Ice Cream Co., supra; Hays, supra, 41 Calif. L.Rev. at 52. This factor seems unrelated to whether the information relating to a plaintiff's customers is a trade secret, but solicitation of a plaintiff's customers by a former employee who uses allegedly secret information is more likely to be enjoined, and use of the information prohibited, where the defendant makes unfair use of the information, even if its confidential nature is not as clearly shown.
There are California cases in which the facts alleged were insufficient as a matter of law to support a finding that the information was confidential or that solicitation was an unfair trade practice. See, e. g., Mathews Paint Co., supra (complaint fails to allege that defendants acquired information not readily accessible to others; customers for seller of paints and lacquer in wholesale quantities obviously includes furniture refinishers and upholsters); Continental Car-Na-Var Corp., supra (evidence undisputed that potential customers of floor cleaning and finishing business were commonly known in the trade); Fortna, supra (realtors and financial institutions obvious source of customer information for termite exterminator). See also, e.g., Best Dairy Farms, Inc. v. Houchen, 152 Mont. 194, 448 P.2d 158 (1968). In light of our analysis of California law, however, the materials advanced by Hollingsworth created genuine issues of material fact regarding whether the information in question was readily accessible, whether the purchasing decisions of terminal customers were influenced by the personality and style of the salesman more than price, quality, and service, and whether the defendants had a purpose to injure plaintiff's business over and above lawful competitive intent.
Defendant claims that some of the evidence relied on by plaintiff would be inadmissible at a trial, and thus that it cannot be considered in passing on the propriety of granting summary judgment. In general, only admissible evidence may properly be considered by a trial court in granting summary judgment. See, e. g., United States v. Dibble, 429 F.2d 598, 601-02 (9th Cir. 1970).
According to the affidavit of W. A. Harris, Vice-President of Sales for the Western Region of Hollingsworth, there is no directory containing the names of solderless terminal users. Based on personal knowledge, Harris also estimated that only 35%-40% of the firms listed in public records under relevant headings such as electrical equipment manufacturers use solderless terminals and that about 10% of solderless terminal users called upon by Hollingsworth salesmen became actual customers. The depositions and affidavits indicate that while Hollingsworth has several competitors. both in California and nationwide, there exists a genuine dispute whether some of plaintiff's customers had been contacted by other solderless terminal sellers prior to Turley's solicitations on behalf of Hoffman. Pl. Mot. Pr. Inj. 73; e. g. Deposition of William Turely 5, 26, 49 (Vol. 4); Deposition of Edward Morton 80-82; Deposition of Joseph Cottrell 62-63. Harris also stated in his affidavit that Hollingsworth had spent substantial amounts of time and money soliciting customers and acquiring knowledge of their names and characteristics, and that contacting potential customers sometimes involved approaches other than consulting public directories such as advertising or participating in trade exhibitions. In short, there are genuine issues of fact regarding the ease with which potential and actual terminal customers can be located and the advantage which use of another seller's customer list gives to a competitor. Similar factual issues exists regarding the price of Hollingsworth's products. There is evidence Hollingsworth sometimes quoted prices to potential and actual customers to be compared with those of other sellers, and that Hollingsworth and Hoffman exchanged outdated price lists at least once, although the record is unclear whether this exchange was authorized by the companies. Such a finding might undercut a claim that this information was secret. Moreover, defendants contend that the information was of no use since Hollingsworth subsequently changed its prices and deviates in unpredictable ways from its announced prices. These issues present genuine disputes to be resolved after further proceedings.
Defendants respond that the ability to sell terminals depends primarily on price, quality, delivery, and service, and that personal relations play little or no part in the purchasing decisions of customers. They contend Hollingsworth salesman do not deliver the products they sell and that most terminal customers reorder by phone, both of which suggest the lack of any personal relationship. Hoffman finally notes that its prices are in general somewhat lower than those of Hollingsworth, and this is the principal reason why customers decided to buy from Hoffman. Defendants may be correct as a factual matter, and the issue may be ultimately resolved in their favor, but at this stage of the proceedings genuine disputes of material fact exist.
We recognize that no clear line distinguishing those cases where a defendant is entitled to judgment as a matter of law from those where genuine factual disputes remain emerges from the California precedents. The problem is more difficult where, as here, genuine disputes relate to facts which themselves are inferred from other disputed evidentiary facts. Nevertheless, especially in light of recent cases such as Klamath-Orleans, supra, and Greenly, supra, which protected customer information in contexts that could be though of as commercial, "[w]e believe that summary judgment is inappropriate in this case, even though appellants' factual showing leaves something to be desired in both quality and quantity." Arney v. United States, 479 F.2d 653, 660 (9th Cir. 1973). See generally Franklin Nat'l Bank v. L. B. Meadows Co., 318 F. Supp. 1339, 1343-46 (E.D.N.Y. 1970) (Weinstein, J.).
Absent a contract between the plaintiff and a customer, solicitation by an employee of his former employer's customers will not be enjoined unless some type of unfair trade practice is shown, such as where trade secrets or confidential information is used in the solicitation. Continental Car-Na-Var Corp., supra, 24 Cal.2d at 110, 148 P.2d at 13; 4 B. Witkin, Summary of California Law § 396 (8th ed. 1974 Supp. 1978). There is no evidence here of an attempt to discredit or destroy confidence in Hollingsworth's product such as would amount to unlawful interference with prospective business advantage. Compare Ernst Ernst v. Carlson, 247 Cal.App.2d 125, 55 Cal.Rptr. 626 (1966) (attempt by accountant to discredit former employer). To prohibit a company from soliciting the customers of a competitor, even a competitor's long-standing customers, where such solicitation does not otherwise constitute an unfair trade practice, would be inconsistent with the balance between stability of contractual business relationships and encouragement of competition expressed in cases such as Imperial Ice Co. v. Rossier, 18 Cal.2d 33, 112 P.2d 631 (1941).
Whether or not appellant has a viable claim depends on the trade secret issue discussed above. Mere solicitation of an employee, under no contract of employment, to leave and associate with a competing firm is not illegal. See, e. g., Buxbom v. Smith, 23 Cal.2d 535, 547, 145 P.2d 305, 310 (1944). "However, if either the defecting employee or the competitor . . . is guilty of some concomitant, unconscionable conduct, the injured former employer has a cause of action to recover for the detriment he has thereby suffered." Diodes, Inc. v. Franzen, 260 (Cal.App.2d 244, 255, 67 Cal.Rptr. 19, 26 (1968). Thus, if there is a "misappropriation of trade secrets as a concomitant of the solicitation," id. at 256, 67 Cal.Rptr. at 26, relief would be granted. Hence if the customer information which Reed and Turley communicated to Hoffman can be considered a trade secret, Hollingsworth is entitled to relief. We therefore reverse and remand this aspect of the case.
The district court found as a fact that "The document entitled `EMPLOYEE'S RESTRICTIVE COVENANTS' was signed by Mr. Turley without any negotiation, arms-length or otherwise, with Hollingsworth. It was imposed on Mr. Turley as a condition to his continuing employment, without consideration to Mr. Turley for signing the document." C.T. 282. It held as conclusions of law:
We think the applicable California law is 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." Hays, supra, 51 Calif.L.Rev. at 69. See also Swenson v. File, 3 Cal.3d 389, 395, 475 P.2d 852, 856, 90 Cal.Rptr. 580, 584 (1970); Golden State Linen Serv. v. Vidalin, 69 Cal.App.3d 1, 9, 137 Cal.Rptr. 807, 812 (1977); State Farm Mut. Auto. Ins. Co., supra, 174 Cal.App.2d at 426-27, 344 P.2d at 826. Cal. Bus. Prof.Code § 16600 (West 1964) provides that "Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Hence, the restrictive covenant will not be given effect in the California courts if it violates a strong California public. policy. URY v. Jewelers Acceptance Corp., 227 Cal.App.2d 11, 38 Cal.Rptr. 376 (1964). In Frame v. Merrill Lynch, Pierce, Fenner Smith, Inc., 20 Cal.App.3d 668, 97 Cal.Rptr. 811 (1971); where an employment contract provided for forfeiture of profit-sharing rights by an employee who resigned and then engaged in competition with the former employer, the court held that section 16600 does represent a strong public policy. Id. at 673, 97 Cal.Rptr. at 814. We conclude that if a California court would declare the restrictive covenant between Turley and Hollingsworth to violate section 16600, the court would not enforce the covenant even though it might be enforceable under Pennsylvania contract law.
This language encompasses the practices sought to be restrained by the Employee's Restrictive Covenants.
On the other hand, if the information used by the former employee is confidential or his solicitation activity constitutes unfair competition, then contracts with language similar to that agreed to by Hollingsworth and Turley have been enforced by California courts. See, e. g., Gordon v. Landau, 49 Cal.2d 690, 321 P.2d 456 (1958); Southern California Disinfecting Co. v. Lomkin, 183 Cal.App.2d 431, 7 Cal. Rptr. 43 (1960); State Farm Mut. Auto. Ins. Co., supra; Ingrassia v. Bailey, 172 Cal.App.2d 117, 341 P.2d 370 (1959); Gordon v. Wasserman, 153 Cal.App.2d 328, 314 P.2d 759, 760-61 (1957); Rossiter v. Thompson, 66 Cal.App. 491, 226 P. 806 (1924); Hays, supra, 51 Calif.L.Rev. at 69-73. Since we have held summary judgment was not properly entered on the unfair competition claim, we cannot conclude at this time that the contract is unenforceable because of the public policy expressed in Cal.Bus. Prof. Code § 16600.
These cases also indicate the district court erred in holding that the agreement was an unenforceable contract of adhesion and was obtained through illegal business compulsion. The sole case cited by defendants in support of the court's conclusion is International Fisherman Allied Workers v. Stemland, 97 Cal.App.2d Supp. 931, 219 P.2d 554 (App.Dep't Super.Ct. 1950), where a court held unenforceable an agreement imposed by a labor union on the employer of our workers to guarantee payment of a fine imposed on the workers by the union and without which the employer could not undertake a planned business venture. The disparate factual contexts of Stemland and this case indicate that the finding of duress there does not require such a finding here. For example, the reasons why use of confidential information and solicitation of customers of a former employer are sometimes prohibited were absent in Stemland. Requiring an employee to sign an agreement not to disclose confidential information of the employer or solicit customers dealing with the employer is clearly not per se illegal in California. Yet neither the district court nor the defendants have advanced any theory indicating that Turley's situation differed from those of the employees in the above cases in ways requiring a finding of duress as a matter of law, assuming the court ultimately finds the information confidential and the solicitations unfair. We therefore reverse the judgment of the district court on this issue.
As our discussion below of Pennsylvania cases indicates, we think the result would be the same under Pennsylvania law.
A final ground for finding the contract unenforceable was the supposed lack of consideration given for Turley's promise. The defendants apparently agree with Hollingsworth that the issue of consideration is governed by Pennsylvania law. On first analysis, there is considerable doubt whether this agreement would be enforceable under Pennsylvania law. While Pennsylvania courts enforce reasonable restrictive covenants as part of an initial employment agreement, when such an agreement is made at a later date the courts require some change in the employee's employment status. See Jacobson Co. v. International Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967). The distinction emphasized in the Pennsylvania courts between restrictive covenants signed as part of the initial employment agreement and those signed at a later date without a change in the employee's employment status has been forcefully criticized, see, e. g., Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279, 284-87 (1974) (dissent), but it nevertheless is the law of Pennsylvania. Without engaging in detailed comparison, the evidence advanced by Hollingsworth would not be sufficient under Pennsylvania law to show any change in employment status sufficient to support a finding that the restrictive covenant was enforceable. See, e. g., John G. Bryant Co. v. Sling Testing Repair, Inc., 471 Pa. 1, 369 A.2d 1164 (1977); Maintenance Specialties, Inc., supra; Jacobson, supra; Capital Bakers, Inc. v. Townsend, 426 Pa. 188, 231 A.2d 292 (1967).
Our decision not to resolve the potentially thorny choice of law and contracts questions presented here is influenced by our skepticism regarding the continuing importance of the contract claim in this lawsuit. If the district court on remand ultimately concludes that defendants did not engage in any acts of unfair competition, then enforcement of any of the material provisions in the contract would violate section 16600 of the Business and Professions Code, and the contract therefore would be unenforceable. Anything we might say at this point concerning consideration doctrine or whether California or Pennsylvania law applies would be unnecessary to resolution of the case. On the other hand, if the court ultimately concludes that the defendants engaged in unfair competition in ways which also would constitute a breach of the agreement, the only additional right or remedy which would be secured under the contract would be an award of attorneys fees. At that point, issues of consideration might become relevant, but they would arise in a context markedly different from that in which they now appear. As is clear from our opinion, in California the tort and contract issues are closely related. Analysis of the consideration issue is best conducted in the first instance by the district court after it passes on plaintiff's tort claims in light of our opinion.
Hollingsworth also alleged that Hoffman injured its business by making sales below cost for the purpose of stifling competition in violation of Cal.Bus. Prof. Code § 17043 (West 1964), which provides:
recognizing that California law protects an individual's substantial interest in unrestrained pursuit of his livelihood and right to change employers
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