..
Court of Appeal, Fourth District, Division 1, California.
Throwing out an injunction of
Judge Judith Hayes in San Diego Superior Court

RETIREMENT GROUP v. GALANTE

The RETIREMENT GROUP, Plaintiff and Respondent, v. James GALANTE et al.,
Defendants and Appellants.

No. D054207.

-- July 30, 2009

Law Offices of David H. Schwartz, David H. Schwartz, Gregory J. Wood, San Francisco;
Marks, Golia & Finch, Davide Golia and Jeffrey B. Baird, San Diego,
for Defendants and
Appellants.

Duckor, Spradling, Metzger & Wynne, Scott L. Metzger and Kevin L. Wheeler, San Diego, for
Plaintiff and Respondent.

The Retirement Group 1 (TRG) filed this action alleging numerous individually named
defendants,2 formerly affiliated with TRG, had established a business in competition with
TRG.   The complaint alleged that Advisors had misappropriated TRG's trade secrets, which
Advisors were using to solicit TRG's existing customers to change their patronage to Advisors'
competing business.   TRG sought and obtained a preliminary injunction that enjoined
numerous categories of conduct by Advisors.   This appeal challenges the preliminary
injunction only insofar as it barred Advisors from “[d]irectly or indirectly soliciting any [current]
TRG [customers] ․ to transfer any securities account or relationship from TRG to [Advisors] or
any broker-dealer or registered investment advisor other than TRG.”

I

FACTUAL AND PROCEDURAL BACKGROUND

A. The Parties

In the early 1990's, Jastremski and Frank Cuenca formed an association and began doing
business under the name “The Retirement Group.”   They operated that association on an
informal basis until approximately 2006.   However, when Jastremski regained some of his
securities licenses, he formally assumed a “partnership” interest in TRG.3

TRG's business had two components:  a Broker/Dealer component and a Registered
Investment Advisor (RIA) component.   Some of TRG's customers “entered into a direct
securities account relationship” with a securities broker/dealer, which cleared the securities
transactions for the customer and held the account for the customer.   During the relevant
period, Securities Services Network, Inc. (SSN) was the broker/dealer that provided those
services to TRG customers.   TRG had independent contractor relationships with various
Registered Representatives (including some of the defendant Advisors here) licensed by the
Securities Exchange Commission (SEC) to sell securities and provide investment advice to
customers, and these Registered Representatives (RRs) also entered into independent
contractor relationships with SSN.

The RIA component of TRG business, as described by Jastremski, involved RRs acting “under”
a RIA to provide investment advice to customers on a fee-for-service basis.   The customer
entered into an independent investment advisor agreement with the RR that granted the RR
under the RIA limited discretion regarding the account, and that “custodied” the customer's
securities with broker dealers.

TRG spent substantial resources to develop its customer base through seminars and other
marketing efforts, and approximately 95 percent of TRG's customers were obtained from these
marketing efforts.   TRG conducted seminars throughout the country to generate leads, had
its agents pursue leads through telephonic contacts with prospective customers, and had its
agents spend many hours in telephonic contact with customers and brokers.   By the time
Advisors terminated their relationship with TRG, a database maintained by TRG contained the
names of customers and potential customers (as well as contact information for these persons)
essential to maintaining TRG's business, and TRG took precautions to maintain the
confidentiality of its database.4  One of those precautions was that no person was allowed to
access the secure database unless and until that person had signed an agreement requiring
him or her to maintain the confidentiality of information in the database.5  Additionally, TRG's
secure database was configured to preclude electronic copying of any information in that
database.

B. The Dissolution

During the summer of 2008, Cuenca told Jastremski that he was terminating his relationship
with Jastremski and was joining a different company (defendant Monarch Retirement &
Investments (Monarch)) that would be competing with TRG.   Monarch had been formed by
several individuals (defendants Lambrix, Sullivan, Laub and McElderry) who had been
independent contractors for TRG.   Shortly after Cuenca joined Monarch, defendant Galante
(who had also been an independent contractor for TRG) also terminated his relationship with
TRG and thereafter joined Monarch.

Advisors contacted many of their customers to inform them that Advisors were switching to a
new RIA, as well as to a new broker/dealer, and provided the customer with a form if the
customer wanted to follow them and designate SII Investments, Inc. (SII) as the broker/dealer,
and that Advisors would be their RR at SII and their designated independent advisor.   For
many of the customers contacted, Advisors obtained the names and contact information from
databases owned and maintained by independent third parties, including SSN.   At least one
Advisor had many of his customer's names and contact information on a personal list he
maintained.6

C. The Lawsuit

TRG filed this action that (as amended) alleged numerous claims.   Insofar as relevant to this
proceeding, however, TRG alleged Advisors had misappropriated the confidential information
contained on TRG's secure database, the confidential information constituted trade secrets of
TRG, and Advisors were using the confidential information to solicit existing customers of TRG
to leave TRG and transfer their accounts to Advisors, as well as to solicit prospective
customers.

TRG sought and obtained a preliminary injunction precluding Advisors from
engaging in numerous categories of conduct.   The fourth category of enjoined conduct
(Category 4), and the only aspect of the preliminary injunction challenged in the present
proceeding, included a prohibition against Advisors from “[d]irectly or indirectly soliciting any
current TRG [customers] to transfer any securities account or relationship from TRG to
[Advisors] or any broker-dealer or registered investment advisor other than TRG[.]”  A
separate category of the injunction (Category 3) provided Advisors were enjoined from “[u]sing
in any manner TRG information found solely and exclusively on TRG databases.  [However,] [s]
imilar information found on servers, databases and other resources owned and operated by
other entities or businesses is excluded from the injunction[.]”

TRG subsequently filed an application for an order to show cause re
contempt, asserting Advisors had violated the terms of the
injunction
by, among other things, “continu[ing] to contact [TRG customers] in an effort to
solicit their business ․ even after three ex parte hearings to stop this conduct and despite
TRG's counsel's numerous letters advising [Advisors] that this conduct would not be
tolerated.”   Advisors opposed the application, and cross-petitioned for an order clarifying or
modifying the injunction.  
Advisors' cross-petition asserted the conduct enjoined by
Category 4 did not define the term “solicit,
” Advisors were left to guess at what conduct
might violate the injunction under the recurring circumstances then confronting Advisors,7 and
therefore Advisors moved to modify Category 4 to clarify what conduct was proscribed.  
The
court declined to modify the injunction.

Advisors timely appealed the order granting TRG's motion for preliminary injunction.8
Advisors challenge only the injunctive relief granted by Category 4,
asserting the relief granted violates Edwards v. Arthur Andersen
LLP (2008) 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285 (Edwards 
) and is beyond the relief otherwise authorized under California law.9

II

ANALYSISA. Legal Framework

Advisors assert the court's injunction against “directly or indirectly soliciting any current TRG
customers to transfer any securities account or relationship from TRG to [Advisors] or any
broker dealer or registered investment advisor other than TRG” is invalid.   To determine this
issue, we are required to examine and resolve the tension between two competing strands of
legal principles in California.   The first strand, on which Advisors rely, provides that California
courts refuse to enforce most “noncompetition” agreements as violative of a strong public
policy, embodied in Business and Professions Code section 16600 (§ 16600), favoring free
competition.   The competing strand, on which TRG relies, provides that California courts will
protect an employer from the misappropriation of its trade secrets by anyone, including its
former employees.   We examine each in turn.

 Section 16600

“[A]t common law and in many states, a restraint on the practice of a trade or
occupation, even as applied to a former employee, is valid if reasonable [.]”  (Bosley
Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288, 207 Cal.Rptr. 477.)


However, California long ago rejected the so-called “rule of reasonableness” when it
enacted Civil Code sections 1673 through 1675, the predecessor sections to
Business and Professions Code sections 16600 through 16602.  
“At least since
1872, a noncompetition agreement has been void unless
specifically authorized by sections 16601 or 16602.”
 (Bosley, at p. 286,
207 Cal.Rptr. 477.)


These legislative enactments
“settled public policy in favor of open
competition,
and rejected the common law ‘rule of reasonableness,’ [and] [t]oday in
California, covenants not to compete are void, subject to several exceptions․”  (Edwards,
supra, 44 Cal.4th at p. 945, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

Because Edwards appears pivotal to resolution of this appeal, we examine it in detail.   There,
the employee (Edwards) signed a nonsolicitation agreement, substantively indistinguishable
from the nonsolicitation agreement in this case, as a condition to his employment with
Andersen.   When Andersen was forced to sell Edwards's practice group to a third party, the
third party (HSBC) agreed to hire Edwards but required (as a condition of hiring) that Edwards
obtain a “Termination of Non-compete Agreement” (TONC) to obtain employment with HSBC.  
The TONC required, among other things, that Edwards voluntarily resign from and release
Andersen from any and all claims against Andersen.   In exchange, Andersen would agree to
release Edwards from the noncompetition agreement;  however, Andersen would not release
Edwards from the noncompetition agreement unless he signed the TONC.   Edwards signed
HSBC's offer letter but refused to sign the TONC;  in response, Andersen terminated
Edwards's employment and refused to release him from the noncompetition agreement, and
HSBC therefore withdrew its offer of employment to Edwards.  (Edwards, supra, 44 Cal.4th at
pp. 942-943, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

Edwards's complaint against Andersen alleged a claim for intentional interference with
prospective economic advantage.   The Edwards court noted an essential element of the claim
was a showing there was an intentional act by the defendant designed to disrupt the
relationship that was “wrongful, independent of its interfering character.  (Della Penna v.
Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392-393, 45 Cal.Rptr.2d 436, 902 P.2d
740.)  ‘[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some
constitutional, statutory, regulatory, common law, or other determinable legal standard.’  
[Quoting Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1159, 131 Cal.
Rptr.2d 29, 63 P.3d 937.]”   (Edwards, supra, 44 Cal.4th at p. 944, 81 Cal.Rptr.3d 282, 189 P.
3d 285.)   The trial court ruled against Edwards on this claim, concluding the noncompetition
agreement did not violate section 16600 because it was narrowly tailored and did not deprive
Edwards of his right to pursue his profession, and therefore Andersen's conduct in requiring
Edwards to sign the noncompetition agreement and TONC was not an unlawful act.  (Ibid.)  In
the Court of Appeal, Edwards argued the “independently wrongful act” requirement was met
because, in part, the noncompetition agreement was illegal under section 16600, which
rendered Andersen's demand that he give consideration to be released from it against public
policy.   The Court of Appeal agreed, holding section 16600 invalidated the noncompetition
agreement and therefore purporting to require Edwards to sign the TONC as consideration to
be released from the noncompetition agreement was an independently wrongful act for
purposes of Edwards's intentional interference with prospective economic advantage claim.  
(Edwards, at pp. 944-945, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

The Edwards court, affirming the Court of Appeal's
analysis of the invalidity of the noncompetition agreement,
noted section 16600 “protects ‘the important legal right of
persons to engage in businesses and occupations of their
choosing’ ”
(Edwards, supra, 44 Cal.4th at p. 946, 81 Cal.Rptr.3d 282, 189 P.3d 285,
quoting Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1520, 66 Cal.Rptr.2d 731), and
under section 16600's plain meaning “an employer cannot by contract restrain a former
employee from engaging in his or her profession, trade, or business unless the agreement falls
within one of the exceptions” to section 16600.  (Edwards, at p. 946, 81 Cal.Rptr.3d 282, 189
P.3d 285.)   Importantly, the Edwards court rejected Andersen's argument that the term
“restrain” under section 16600 should be construed as meaning “simply to ‘prohibit,’ so that
only contracts that totally prohibit an employee from engaging in his or her profession, trade,
or business are illegal[, and therefore] a mere limitation on an employee's ability to practice his
or her vocation would be permissible under section 16600, as long as it is reasonably based.”  
(Edwards, at p. 947, 81 Cal.Rptr.3d 282, 189 P.3d 285.)  Edwards also rejected Andersen's
assertion that California decisional authority has embraced the rule of reasonableness in
evaluating competitive restraints, the predicate to Andersen's claim that “ ‘only broad
agreements that prevent a person from engaging entirely in his chosen business, trade or
profession [violate section 16600 and] [a]greements that do not have this broad effect-but
merely regulate some aspect of post-employment conduct, e.g., to prevent raiding [employer's
personnel]-are not within the scope of [s]ection 16600.’ ”  (Id. at p. 947, 81 Cal.Rptr.3d 282,
189 P.3d 285.)   Instead, concluded Edwards, the decisional law on which Andersen relied
involved noncompetition clauses in situations in which express statutory exceptions to section
16600 were applicable.  (Edwards, at pp. 947-948, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

Edwards also rejected Andersen's argument that California should superimpose a nonstatutory
exception to section 16600 by adopting the limited or “narrow-restraint” exception discussed by
the Ninth Circuit in Campbell v. Board of Trustees of Leland Stanford Junior University (9th Cir.
1987) 817 F.2d 499, which the trial court in Edwards relied on to uphold the noncompetition
agreement.  Edwards noted the Campbell court, despite acknowledging California had
rejected the common law “rule of reasonableness” with respect to restraints on the ability to
pursue a profession, nevertheless concluded section 16600 “ ‘only makes illegal those
restraints which preclude one from engaging in a lawful profession, trade, or business' ” and
remanded the case to the district court to allow the employee to prove the noncompetition
agreement at issue completely restrained him from practicing his profession within the meaning
of section 16600.  (Edwards, supra, 44 Cal.4th at p. 948, 81 Cal.Rptr.3d 282, 189 P.3d 285;  
Campbell, at pp. 502-503.)  Edwards declined to adopt Campbell's approach because
Campbell, in concluding California courts have excepted from section 16600 agreements that
bar one from pursuing only a small or limited part of the profession (Campbell, at p. 502),
appeared to have confused the import of Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.
App.2d 188, 41 Cal.Rptr. 714 and King v. Gerold (1952) 109 Cal.App.2d 316, 240 P.2d 710,
and Andersen's reliance on those cases for carving out an exception to section 16600 was
similarly misplaced.   Edwards noted Boughton did not involve a restriction on the employee's
practice of a profession or trade, but took the form of a covenant in a deed to a parcel of land
that specified the land could not be used as a gasoline service station for a specified time
period.  (Edwards, at p. 949, 81 Cal.Rptr.3d 282, 189 P.3d 285;  Boughton, at p. 188, 41 Cal.
Rptr. 714.)  Edwards also noted Boughton relied on King, which involved a claim of unfair
competition.  (Edwards, at p. 949, 81 Cal.Rptr.3d 282, 189 P.3d 285;  King, supra.)   Because
King did not merely involve an injunction against a former employee's manufacture and sale of
goods (house trailers), but instead involved an injunction involving the former employee's
alleged use of a trailer design substantially similar to his former employer's (the inventor of the
design), Edwards concluded King was not authority for the proposition that noncompetition
clauses imposing a limited or narrow-restraint were excepted from section 16600.  (Edwards,
at pp. 948-949, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

Edwards recognized other federal cases had followed Campbell's narrow-restraint
exception to section 16600, but concluded California courts have neither embraced
the Ninth Circuit's narrow-restraint exception nor endorsed its reasoning,
and
concluded:

“[W]e are of the view that C
alifornia courts ‘have been clear in their
expression that section 16600 represents a strong public policy of
the state which should not be diluted by judicial fiat.’
 [Quoting Scott v.
Snelling and Snelling, Inc. (N.D.Cal.1990) 732 F.Supp. 1034, 1042.]  Section 16600 is
unambiguous, and if the Legislature intended the statute to apply only to restraints that were
unreasonable or overbroad, it could have included language to that effect.   We reject
Andersen's contention that we should adopt a narrow-restraint exception to section 16600 and
leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt
additional exceptions to the prohibition-against-restraint rule under section 16600.”  
(Edwards, supra, 44 Cal.4th at pp. 949-950, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

Although Edwards reaffirmed the broad California rule that invalidates noncompetition
agreements falling outside of statutorily-prescribed exceptions, Edwards expressly stated it was
not “address[ing] the applicability of the so-called trade secret exception to section 16600 [.]”  
(Edwards, supra, 44 Cal.4th at p. 946, fn. 4, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

 Trade Secrets

An equally lengthy line of cases has consistently held former employees may not
misappropriate the former employer's trade secrets to unfairly compete with the former
employer.   The court in Morlife Inc. v. Perry, supra, 56 Cal.App.4th at pages 1519 to 1520, 66
Cal.Rptr.2d 731, articulating the competing considerations, stated:

“While it has been legally recognized that a former employee may use general knowledge, skill,
and experience acquired in his or her former employment in competition with a former
employer, the former employee may not use confidential information or trade secrets in doing
so.  [¶] Our Supreme Court recognized the delicate balance between promoting unfettered
competition and protecting business from unfair conduct in Continental Car-Na-Var Corp. v.
Moseley (1944) 24 Cal.2d 104, 148 P.2d 9:  ‘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 also be solicitous for the right inherent in all people, not fettered 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.  [Citation.]’  (Id. at p. 110, 148 P.2d 9.) [¶]  To be sure, we acknowledge
the important legal right of persons to engage in businesses and occupations of their
choosing․  Yet also fundamental to the preservation of our free market economic system is the
concomitant right to have the ingenuity and industry one invests in the success of the business
or occupation protected from the gratuitous use of that ‘sweat-of-the-brow’ by others.”

In accordance with these principles, the courts have repeatedly held a former employee may
be barred from soliciting existing customers to redirect their business away from the former
employer and to the employee's new business if the employee is utilizing trade secret
information to solicit those customers.  (See American Credit Indemnity Co. v. Sacks (1989)
213 Cal.App.3d 622, 634, 262 Cal.Rptr. 92 [“in the absence of a protectable trade secret, the
right to compete fairly outweighs the employer's right to protect [customers] against
competition from former employees”];  accord, Aetna Bldg. Maintenance Co. v. West (1952) 39
Cal.2d 198, 204-206, 246 P.2d 11.)   Thus, it is not the solicitation of the former employer's
customers, but is instead the misuse of trade secret information, that may be enjoined.  (Cf.
Southern Cal. Disinfecting Co. v. Lomkin (1960) 183 Cal.App.2d 431, 442-448, 7 Cal.Rptr. 43;  
accord, Hollingsworth Solderless Terminal Co. v. Turley (9th Cir.1980) 622 F.2d 1324, 1338
[“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.’ ”].)

Numerous courts have concluded customer lists can qualify for trade secret protection.  (See
Gordon v. Landau (1958) 49 Cal.2d 690, 321 P.2d 456;  Gordon v. Schwartz (1956) 147 Cal.
App.2d 213, 305 P.2d 117;  Gordon v. Wasserman (1957) 153 Cal.App.2d 328, 314 P.2d
759.)   Although “courts are reluctant to protect customer lists to the extent they embody
information ․ ‘readily ascertainable’ through public sources, such as business directories ․
where the employer has expended time and effort identifying customers with particular needs
or characteristics, courts will prohibit former employees from using this information to capture a
share of the market.   Such lists are to be distinguished from mere identities and locations of
customers where anyone could easily identify the entities as potential customers.”   (Morlife
Inc. v. Perry, supra, 56 Cal.App.4th at pp. 1521-1522, 66 Cal.Rptr.2d 731.)

B. Evaluation

 We distill from the foregoing cases that section 16600 bars a court from specifically
enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee
from soliciting former customers to transfer their business away from the former employer to
the employee's new business, but a court may enjoin tortious conduct (as violative of either the
Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee
from using trade secret information to identify existing customers, to facilitate the solicitation of
such customers, or to otherwise unfairly compete with the former employer.   Viewed in this
light, therefore, the conduct is enjoinable not because it falls within a judicially-created
“exception” to section 16600's ban on contractual nonsolicitation clauses, but is instead
enjoinable because it is wrongful independent of any contractual undertaking.

 Application of these principles here convinces us the injunctive
provisions of Category 4 on its face violate Edwards and, when
viewed in counterpoise with the injunctive provisions of Category 3,
cannot rationally be upheld as an injunction limited in scope to the
only legitimate protection (i.e., enjoining the misappropriation of
TRG's trade secrets) for which injunctive relief may be issued.
  First,
the injunctive provisions of Category 4 purport to bar Advisors from engaging in conduct
substantively indistinguishable from the contractually proscribed conduct that, concluded
Edwards, was violative of the protections of section 16600.10  accordingly, the facial language
contAINED IN CATEGORY 4 transgresses section 16600 under Edwards.

Additionally, we are convinced Category 4 cannot be upheld as an injunction designed to have
the limited effect of protecting against the misappropriation of TRG's trade secrets, because
the injunctive provisions of Category 3 already grant the full range of trade secret protections
to which TRG is entitled.   Category 3 of the injunction, which Advisors do not challenge,
barred Advisors from “[u]sing in any manner TRG information found solely and exclusively [in]
TRG databases ” (italics added) but expressly excluded from its ambit the use of “[s]imilar
information found on servers, databases and other resources owned and operated by other
entities or businesses.”   Thus, absent the provisions of Category 4, Advisors could compete
with TRG for the business of TRG's existing customers by employing all available resources
and information except for those materials (because it is found “solely and exclusively on
TRG's databases”) constituting protectable trade secrets.   Accordingly, Category 4 adds
nothing to further the legitimate scope of protections (e.g. protection of TRG's trade secrets) to
which TRG is entitled, and can only operate to preclude the precise type of competition
Edwards declares is otherwise permissible.

TRG raises several arguments to support its assertion that Category 4 is both a valid
protection of its trade secret information and a proper adjunct to the distinct provisions of
Category 3.   First, TRG asserts the conduct enjoined by Category 4 is outside the boundaries
of Edwards because Edwards expressly excepted from its ruling noncompetition clauses falling
within the trade secret exception to section 16600.   However, Edwards did not approve the
enforcement of noncompetition clauses whenever the employer showed the employee had
access to information purporting to be trade secrets.   Instead, Edwards merely stated it was
not required to “address the applicability of the so-called trade secret exception to section
16600” (Edwards, supra, 44 Cal.4th at p. 946, fn. 4, 81 Cal.Rptr.3d 282, 189 P.3d 285)
because it was not germane to the claims raised by the employee.

TRG next asserts that numerous cases have ruled former employees may not solicit customers
of the former employer, and an injunction may be issued to prevent such solicitation.  
However, we have already concluded it is not the solicitation of the customers, but is instead
the unfair competition or misuse of trade secret information, that may be enjoined.  (See, e.g.,
Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1428-1430, 7 Cal.Rptr.3d 427 [“ 
‘Antisolicitation covenants are void as unlawful business restraints except where their
enforcement is necessary to protect trade secrets.’ ”].)   Indeed, although TRG cites numerous
cases holding an employee may be enjoined from soliciting persons on his or her employer's
trade-secret customer lists, Thompson's rationale for rejecting an analogous argument (which
we echo here) explained “respondents argue [that] the cases hold that a covenant which
barred the salesmen from soliciting business from customers for one year after termination of
employment passed muster under section 16600.   However, respondents leave out the core
of the cases' reasoning:  the information about the customers could be protected because it
was confidential, proprietary, and/or a trade secret.”  (Thompson, at p. 1429, 7 Cal.Rptr.3d
427, italics added.)

The bedrock of TRG's argument appears to be that the trial court properly enjoined Advisors
from soliciting TRG's customers because the trial court necessarily concluded that the only
way Advisors could have known the names and contact information of TRG's customers to
enable Advisors to solicit such persons was if Advisors had misappropriated trade secret
information found solely and exclusively on TRG's databases.   However, TRG did not dispute
that its secure database employed security measures sufficient to prevent downloading of its
contents, thus undermining the factual basis for this assertion.   More importantly, TRG did not
dispute that the names of (and contact information for) existing customers were readily
available to Advisors from independent third party sources such as Schwabb or SSN,11
thereby obviating TRG's claim that the names and contact information of existing customers
constituted protectable trade secret information.  (See generally Advanced Modular
Sputtering, Inc. v. Superior Court (2005) 132 Cal.App.4th 826, 833-835, 33 Cal.Rptr.3d 901 [a
trade secret is information that derives independent economic value from not being generally
known to or discernable by the general public or to persons skilled in the trade].)   Although
TRG peremptorily asserts the names and contact information of customers were protectable
trade secrets notwithstanding the availability of that information to Advisors from third party
databases, TRG cites no pertinent law supporting that claim.12

TRG also asserts Category 4's injunctive provisions are valid, notwithstanding that Category 3
appears to provide all of the relief permitted by law, because the two categories proscribe
different conduct.   TRG argues Category 3 prohibits Advisors from using TRG's trade secret
database to pursue potential or prospective customers identified by TRG's marketing efforts,
while Category 4 prohibits Advisors from soliciting existing customers who had not yet
transferred their accounts.   Although we disagree with TRG's parsing of the injunctive
language insofar as its interpretation adds the above-italicized language to Category 3, we
agree with TRG's construction that Category 3 (barring the use of TRG trade secrets) and
Category 4 (barring the solicitation of existing customers) do proscribe different conduct.  
However, we are convinced that construction undermines rather than supports the validity of
Category 4.   Specifically, because Category 3 already protects against Advisors' use of
TRG's trade secrets, we are unable to perceive how Category 4 can have any additional
operative effect except to bar solicitations not involving the use of trade secret information, and
the latter type of competition appears to constitute the type of conduct sanctioned by Edwards.

TRG also appears to assert the nonsolicitation clauses contained in the Advisors' contracts
are enforceable because they are narrowly crafted to prevent the misuse of trade secret
information and do not entirely bar Advisors from pursuing their vocation of choice.   However,
Edwards rejected the claim that antisolicitation clauses could be exempt from section 16600 if
the conduct covered by such clauses fell within the “narrow-restraint” exception discussed in
Campbell (Edwards, supra, 44 Cal.4th at pp. 948-950, 81 Cal.Rptr.3d 282, 189 P.3d 285), and
we decline TRG's implicit invitation to engraft that exception onto this case.

C. Conclusion

We conclude Category 4 transgresses section 16600 as construed
by Edwards, and cannot be upheld as an injunction designed for the
limited purpose of protecting against the misuse of TRG's trade
secrets.   Accordingly, the trial court erred by granting the
injunctive relief specified in Category 4.

DISPOSITION

The trial court shall vacate the preliminary injunction and
enter a new and different injunction deleting the language
enjoining Advisors
from “directly or indirectly soliciting any current TRG customers
to transfer any securities account or relationship from TRG to defendants or any broker-dealer
or registered investment advisor other than TRG.”   The stay previously issued by this court
on May 19, 2009, shall remain in effect until this opinion becomes final and the remittitur has
been issued.   Defendants are entitled to costs on appeal.

FOOTNOTES

1.   The lawsuit, filed by John Jastremski on behalf of TRG, alleges that Jastremski is
currently the general partner of TRG.

2.   The individual appellants in this proceeding are defendants Michael Lambrix, Tim
Sullivan, Jeremy Laub, and Shawn McElderry.   For ease of reference, we refer to these
defendants collectively as Advisors to reflect their role as investment advisors to the customers
for whom they provided services.

3.   There is substantial dispute over whether TRG was a partnership.   Cuenca's evidence
alleged TRG was a sole proprietorship with Cuenca as sole proprietor.

4.   The precise content of the database, apart from the names and contact information for
existing customers and potential customers, is unclear.   Although TRG's brief on appeal
represented that the database contained extensive additional information (e.g. notations
memorializing the date of contacts with potential or existing customers, the method of contact,
the substance of the conversation, plans for future contacts, financial information on the
customer or prospective customer as well as retirement goals and planned retirement date),
TRG's brief has not directed this court to evidentiary support for these assertions.  (Cf. Morris
v. De La Torre (2005) 36 Cal.4th 260, 265, fn. 2, 30 Cal.Rptr.3d 173, 113 P.3d 1182 [factual
assertions unsupported by citations to the record will be ignored].)

5.   Advisors, with whom TRG had entered into independent contractor relationships, had
signed a written “Marketing and License Agreement” (MLA) that contained numerous clauses,
including clauses that defined TRG's confidential information (MLA, paragraph 1.3) and
covenanted that (both during the term of the relationship and thereafter) Advisors would keep
the information confidential and would not “disclose or use” the information except as provided
by the MLA.

6.   Galante's declaration stated he had a handwritten list of his personal customers, which
he kept because he “contact[ed] them on a regular basis.”   Galante also averred that he
“wanted to check that I had not missed anyone and wrote down some names and contact
information from [TRG's] database,” but averred that information was duplicative of the
information “already available through SSN or other custodial institutions holding the
[customer] accounts and to which I had access.”

7.   Advisors averred that after the preliminary injunction was issued, Jastremski and others
at TRG acting as registered representatives of SSN had their registration terminated and were
no longer registered with any broker/dealer.   Accordingly, SSN sent letters to a limited group
of customers (e.g. those who had not signed documents to follow Advisors to Monarch) stating
these customers no longer had a registered representative for the customer's account, and
advising the customer to find a new brokerage firm.   Advisors averred that these customers
began contacting Advisors to inquire about transferring to SII to have Advisors become their
RR/RIA again, but Advisors were uncertain whether the terms of the injunction barring
“soliciting” would permit Advisors to substantively respond to these inquiries.   Accordingly,
Advisors sought clarification of what conduct would be permissible under the terms of the
injunction.

8.   Advisors also petitioned for a writ of supersedeas seeking (among other things) a stay of
enforcement of the ban on Category 4 conduct and of the pending contempt proceeding
pending the outcome of the present appeal.   On May 19, 2009, this court issued an order
staying the contempt proceeding.

9.   Advisors also challenge the provisions of Category 4 as an
invalid prior restraint on
their First Amendment rights of speech and association, and on the ground
that the enjoined conduct is couched in terms too vague to give fair notice
of the conduct proscribed by the injunction.  
Because of our conclusions, it is
unnecessary to address these separate alleged deficiencies.

10.   The injunction here barred Advisors from “[d]irectly or indirectly soliciting any current
TRG customers to transfer any securities account or relationship from TRG to [Advisors] or
any broker-dealer or registered investment advisor other than TRG[.]”  
The
contractual clause Edwards concluded was unenforceable was
a noncompetition clause
providing the employee was barred from “ ‘perform[ing]
professional services of the type you provided for any [customer for] which you worked,’ ” and
from “ ‘solicit[ing] (to perform professional services of the type you provided) any [customer]’ ”
of the employer, for various periods of time.  (Edwards, supra, 44 Cal.4th at p. 942, 81 Cal.
Rptr.3d 282, 189 P.3d 285.)

11.   Indeed,
when moving to clarify or modify the injunction, Advisors submitted
undisputed evidence that existing customers of TRG were contacting Advisors about moving
their accounts in response to a missive sent to the customer by a third party (not by Advisors),
thus undercutting TRG's claim that Advisors' efforts to solicit TRG's customers must have been
attributable to trade secret information stolen by Advisors from TRG database.

12.   The only law cited by TRG to support its claim that the identities of customers
remained TRG's trade secrets, despite the presence of their names and contact
information on third party databases, is Morlife, Inc. v. Perry,
supra, 56 Cal.App.4th
1514, 66 Cal.Rptr.2d 731.   However, the court in Morlife evaluated a customer list only
available to the employer and those employees to whom the employer disclosed the list (id. at
p. 1521, 66 Cal.Rptr.2d 731), and Morlife expressly noted courts are “reluctant to protect
customer lists to the extent they embody information which is ‘readily ascertainable’ through
public sources, such as business directories.”  (Ibid.)  Because Morlife did not evaluate
whether trade secret lists are protectable when that same list is duplicative of lists available
through third party sources, it provides no assistance in the present case.

McDONALD, J.

WE CONCUR:  NARES, Acting P.J., and O'ROURKE, J.
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settled public policy
in favor of free
speech
Stutz v. Larkins Court of Appeal
decision 2011
California courts ‘have
been clear in ...a strong
public policy of the
state which should not
be diluted by judicial
fiat.’
Metropolitan News-Enterprise
Friday, August 21, 2009
C.A. Tosses Injunction
Against Solicitation of
Former Employer’s
Clients
By SHERRI M. OKAMOTO, Staff Writer
...Based on these principles,
McDonald reasoned that an
employee may be barred from
soliciting existing
customers to redirect their
business away from the former
employer and to the employee’s
new
business if the employee is
utilizing trade secret information
to solicit those customers,
emphasizing “it
is not the solicitation of the
former employer’s customers,
but is instead the misuse of trade
secret
information, that may be
enjoined.”

While client lists can qualify as
trade secrets, McDonald added,
lists that embody information
readily
ascertainable through public
sources do not qualify for
protection.

As The Retirement Group did not
dispute the advisor’s claim that
customer information could be
obtained from independent third
party sources, McDonald said
the client database was not
protectable trade secret
information.



The injunctive provision
challenged on appeal therefore
only served to bar the advisors
from engaging in
conduct that was substantively
indistinguishable from the
contractually proscribed conduct
in a
noncompetition agreement, he
said. Since such a covenant is
void as an unlawful business
restraint
unless enforcement is necessary
to protect a trade secret,
McDonald concluded the
challenged
portion of the injunction could
not be upheld.

Joined by Justices Gilbert Nares
and Terry B. O’Rourke,
McDonald said
the trial court must vacate the
preliminary injunction and enter
a new and
different injunction deleting the
language enjoining advisors from
“directly
or indirectly soliciting any current
TRG customers to transfer any
securities account or
relationship from TRG to
defendants or any broker-dealer
or registered investment advisor
other than
TRG.”