Enforceability of Non-Solicitation Agreements under California Law: Insights from Six Dimensions, Inc. v. Perficient, Inc.

Introduction

The case of Six Dimensions, Inc. v. Perficient, Inc. involves a complex interplay of contract law, unfair competition, and trade secret misappropriation. Six Dimensions, a digital marketing firm, sued its former employee, Lynn M. Brading, and her new employer, Perficient, for breach of contract, unfair competition, and misappropriation of trade secrets. The United States Court of Appeals for the Fifth Circuit delivered a pivotal ruling on August 7, 2020, examining the enforceability of non-solicitation agreements under California law and the procedural aspects of summary judgment.

Summary of the Judgment

The district court had previously granted summary judgment in favor of Six Dimensions on one of the breach of contract claims but dismissed others, including unfair competition claims and misappropriation of trade secrets. Notably, the jury upheld the breach of contract claim related to the 2015 Agreement but rejected claims of trade secret misappropriation. On appeal, the Fifth Circuit reversed the district court's decision regarding Brading's breach of the 2015 Agreement, emphasizing the proper application of California law, while affirming the remaining judgments.

Analysis

Precedents Cited

The Fifth Circuit extensively reviewed California case law to determine the enforceability of non-solicitation clauses. Key precedents included:

EDWARDS v. ARTHUR ANDERSEN LLP (2008): Established that under California Business and Professions Code §16600, any contract restraining lawful trade is void unless it falls within specific statutory exceptions.
LORAL CORP. v. MOYES (1985): Earlier case holding that non-solicitation clauses were enforceable under California law.
AMN Healthcare, Inc. v. AYA Healthcare Servs., Inc. (2018): A more recent case where the court found non-solicitation provisions void, signaling a shift away from Moyes post-Edwards.
Additional regional decisions from federal district courts supporting the strict interpretation of §16600.

The court concluded that the Edwards decision overruled the enforceability established in Moyes, thereby rendering the non-solicitation clause in the 2015 Agreement unenforceable under California law.

Legal Reasoning

The core legal issue centered on whether the non-solicitation clauses in the 2014 and 2015 Agreements were enforceable under California law, specifically §16600, which broadly voids contracts restraining trade. The district court initially held the 2014 Agreement enforceable but reversed this stance upon reconsideration, aligning with the Edwards precedent.

Regarding the 2015 Agreement, the district court had treated it as a separate contract, holding Brading liable for breaching its non-solicitation provision. However, the Fifth Circuit found that Six Dimensions failed to sufficiently argue the separateness and enforceability of the 2015 Agreement at the summary judgment stage. Moreover, given the strong precedent of Edwards, any non-solicitation provision was deemed void unless falling under specific exceptions, which Six Dimensions failed to demonstrate.

Additionally, the court addressed procedural issues concerning the waiver of arguments related to the 2015 Agreement. Since Six Dimensions did not clearly articulate the separateness and enforceability of the 2015 Agreement in their motions, the court found that the district court should not have enforced it, thus reversing the damages awarded based on this breach.

Impact

This judgment underscores the stringent application of California’s §16600 on non-solicitation clauses, reinforcing the ban on contractual restraints of trade unless explicitly covered by statutory exceptions. Organizations must be cautious when drafting such agreements, especially when California law is implicated, as punitive implications arise from broader interpretations that render many non-solicitation clauses unenforceable.

Furthermore, the decision highlights the importance of clearly presenting all contractual arguments during summary judgment motions. Failure to do so can result in waiving essential claims or defenses, potentially limiting the scope of appeal and affecting the final outcome.

Complex Concepts Simplified

California Business and Professions Code §16600

This statute broadly prohibits contracts that restrain anyone from engaging in a lawful profession, trade, or business. Exceptions exist but are narrowly defined, making most non-solicitation and non-compete clauses unenforceable in California.

Summary Judgment

A legal mechanism where the court decides a case without a full trial, determining that there are no genuine disputes of material fact and that the party moving for judgment is entitled to a ruling as a matter of law.

Waiver in Legal Proceedings

When a party fails to assert a right or argument at a crucial stage in the litigation, they may be deemed to have waived that right, meaning they cannot later claim it.

Conclusion

The Fifth Circuit's ruling in Six Dimensions, Inc. v. Perficient, Inc. serves as a critical reminder of the prevailing strictness of California law regarding non-solicitation and non-compete agreements. The reversal of the district court's decision on Brading's breach underscores the necessity for precise and timely legal arguments in contractual disputes. For businesses operating within or engaging with California entities, this judgment emphasizes the need to reconsider the enforceability of restrictions on employee solicitation and mobility, potentially reshaping employment contract practices nationwide.