Apple Sues Former Executive for Starting Competitor During Work Hours

Employers should draft strong agreements to protect their resources

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Apple headquarters

Apple is suing a former employee in California who the company claims started a rival business while on the clock. Although California law favors employee mobility and limits employers' use of noncompete agreements, workers generally can't use company time and resources to set up their own shop.

The tech giant filed a lawsuit in California state court claiming that its former chief architect breached an intellectual property agreement and his duty of loyalty when he allegedly began setting up a competing business during work hours at Apple, according to Yahoo Finance.

The architect's employment agreement stated that he "will not plan or engage in any other employment" competing with Apple. But he argued that the agreement is unenforceable under California law. A judge allowed Apple's case to proceed, noting that "an employee is not permitted to plan and prepare to create a competitive enterprise prior to termination if the employee does so on their employer's time and with the employer's resources." 

"That holding leaves open some questions," said Scott Witlin, an attorney with Barnes & Thornburg in Los Angeles. The employee owes the employer a duty of loyalty under the California Labor Code, so must the employee refrain from all competition? 

"Silicon Valley has long had a practice of employees leaving their employer to strike out on their own, but even at Apple's birth, Steve Wozniak first offered his idea for a PC to his employer HP before starting Apple Computer with Steve Jobs," Witlin noted.

Under California law, "An employee who has any business to transact on his own account, similar to that entrusted to him by his employer, shall always give the preference to the business of the employer."

Here are some points for employers to keep in mind about using noncompetes and other agreements—such as nondisclosure and confidentiality agreements—that restrict what employees can say and do in relation to the business.

Law Favors Employee Mobility

When compared with most states, noncompete agreements and other restrictive covenants that curb an employee's ability to change jobs are severely limited in California, explained Branigan Robertson, an employee-rights attorney in Aliso Viejo. Under the California Business and Professions Code Section 16600, contract clauses that restrain a person from "engaging in a lawful profession, trade or business of any kind" are generally void. 

"It's a short little law with a lot of punch," Robertson said. With limited exceptions, California employers can't prevent employees from leaving the company and continuing to work in the industry, directly competing, or starting their own competitive business.

According to California Supreme Court precedent, this law demonstrates a "settled legislative policy in favor of open competition and employee mobility."

The purpose of the law is to give job seekers the freedom to quit and go work for a competing company, start their own company, or do something else with little fear of retribution by their former employer, Robertson said.

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Witlin noted that there are a number of countervailing policies that limit the rights of employees to set up a competitor while they are employed. "Of course, an employee cannot make use of the employer's trade secrets," he observed.

There are other, limited circumstances in which noncompete agreements are allowed. "Contrary to common belief, some agreements not to compete with current or former employees are enforceable in California," explained Mark Terman, an attorney with Drinker Biddle & Reath in Los Angeles. "And for good reason."  For instance, most noncompetes in connection with the sale of ownership are enforceable. "This makes sense because one should not be able to sell ownership and goodwill in the business and then turn around to compete against it," he said.

He noted that employees not only have a duty of loyalty to their employer but also should not be able to draw a paycheck and use company resources and ideas to compete against the employer. Even after employment ends, former employees cannot lawfully use the former employer's trade secrets to compete. 

Tips for Employers

There are several things employers can do to protect their trade secrets and strengthen their employment agreements with employees. The main reasons employers lose trade secret litigation, Robertson noted, is because it's usually pretty easy for the employee's lawyer to show that the company didn't take steps to keep their "trade secret" an actual secret.

"So, make a serious effort to protect your trade secrets before anyone leaves with them," he said. This includes limiting access to such information to only those who need to know and keeping trade secrets secure with passwords and firewalls, clearly identifying things as confidential, and getting appropriate advice when needed from an attorney.

"Have your employees sign confidentiality agreements," Robertson added. These agreements should clearly list what information, practices, and items the company considers confidential and what it does not.

In addition to written confidentiality agreements that employers should have with all employees who have access to confidential, proprietary and trade secret information, employers should require employees to sign an agreement that they will not compete against the company during employment, Terman said.

Employers should also require employees, especially those whose job it is to invent and innovate for their employer, to enter into agreements assigning all inventions and creations to the employer, he suggested.

"New hires should be screened and agree in writing that they have not taken—nor will they use—anyone else's trade secrets," he added, noting that it's a good idea to conduct exit interviews to remind employees that their confidentiality obligations continue after they leave.  

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