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California Sunshine Warms the Market: A Twist on Customer Non-Solicitation Provisions in the Golden State

Those of you reading our Employee Mobility blog posts are familiar with California’s unique approach to non-compete agreements: they are, except in a few limited circumstances, unenforceable in the Golden State. And that unenforceability extends to post-employment non-solicitation provisions restricting individuals from soliciting business from former customers — a “warm market” to those in the know in the sales community.

But a recent decision highlights an exception to this (infamous) California ban on post-employment solicitation.

In Batts v. Bankers Life & Casualty Company, Timothy Batts, a former Bankers Life employee, lost his bid to sue his former employer for enforcing a post-employment covenant against him. The employee, an insurance agent, sued Bankers Trust for failing to give him notice of its intent to fire him under his employment agreement. The employee claimed the lack of notice prevented him from retrieving “his” client database from Bankers Trust, and thereby deprived him of a “warm market” for his sales efforts on behalf of any new employer.

The court didn’t reach the question of whether Mr. Batts was entitled to retrieve information from “his” client database, though it expressed skepticism as to whether that information was the employee’s property. But the court did reject Mr. Batts’ attack on the post-employment covenant because rather than restricting Mr. Batts’ future employment opportunities, the provision restricted him from inducing Bankers Life customers to relinquish, surrender, or replace any existing insurance policy with Bankers Life. The court reasoned that because Mr. Batts could not tortiously interfere with Bankers Life’s existing customers, a provision in an employment agreement purporting to restrict him from engaging in that conduct was permissible even in the face of California’s ban on post-employment restrictive covenants.

In some respects, Batts squares with the California Supreme Court’s 2008 Edwards v. Arthur Anderson decision, which rejected post-employment customer non-solicitation agreements that prohibit employees from providing services to former clients. Mr. Batts was free to sell another employer’s insurance policies to his former Bankers Life customers — his warm market — as long as he did not induce those customers to cancel their existing policies.

In other respects, however, Batts pushes the Edwards envelope. When, in fact, does an employee’s sale into a warm market cross the tortious interference line? Is it only when a customer cancels an existing contract? What if the customer allows an existing contract to lapse by its terms and then declines to renew? What if the customer purchases additional goods and services — which could otherwise have been purchased from the former employer? And how can businesses define and protect those lines within the confines of California law? Careful drafting of post-employment covenants is in order. And our Employee Mobility Practice Group will continue to monitor developments in the Golden State and elsewhere.

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Jennifer B. Rubin is a Mintz Member who advises clients on employment issues like wage and hour compliance. Her clients range from start-ups to Fortune 50 companies and business executives in the technology, financial services, publishing, professional services, and health care industries.