ENTERTAINMENT LITIGATION: LOSING KEY EXECUTIVES TO COMPETITORS

EXHIBITOR RELATIONS CASE SHOWS EMPLOYERS IN CALIFORNIA THE DIFFICULTY IN PREVENTING EMPLOYEES FROM COMPETING AGAINST THEM

Companies are only as good as their employees. Facing that reality, companies doing business in California have the additional problem of having key employees leave to form a competing business.

California law is clear: “Every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” What this means is that California has become a “right to work” state. No matter how hard companies try, their attempts to prevent departing employees from competing with their former employers – i.e. “engaging in a lawful profession” – is viewed by the courts with skepticism. Something more will be required for a court to intervene.


EXHIBITOR RELATIONS’ NEW COMPETITION

Take the recent case involving Exhibitor Relations (“ER”) and its former president, Paul Dergarabedian, and former operations manager, Marianna Pisterman. ER is the well known company which gathers and publishes data on motion picture box office revenues. Many of the published box office numbers you see in newspapers and the trades are based on numbers compiled and analyses done by ER.

In October 2006, the company was sold. Within a month, ER’s president and operations manager resigned and started their own competing business called Media By Numbers, LLC. Two weeks later, ER filed suit and sought to prevent these former employees from competing with ER’s business analyzing box office numbers.

On January 16, 2007, a Los Angeles County Superior Court judge denied ER’s motion to prevent its former executives from opening Media By Numbers in competition with ER’s business. ER argued that its former employees used its “trade secrets” – namely its customer lists – in establishing their new business. The court noted the fact that the executives may have used names and addresses of customers alone was insufficient to establish that they used ER’s “trade secrets.” The court also found that the parties’ evidence conflicted. Thus, the court could not preclude the executives from operating their new business in competition with ER.

SOLICITING BUSINESS OR ANNOUNCING A NEW JOB?

Although the court’s opinion in the ER case is not binding precedent on other cases, the analysis by the court highlights a number of issues of concern to any company who loses key employees to a competitor.
For example, one of the issues in the case was whether the former ER executives “solicited” ER customers for business or simply announced their new venture. The law is clear that simply announcing your new job or company to your former contacts is proper. Where the announcement crosses over into “solicitation” is more difficult to answer.

However, the real question is whether ER’s customer lists can be viewed as “trade secrets” – because if the “solicitation” of the former employers’ customers did not involve the use of the company’s trade secrets, then the executives could properly solicit those customers. If the company can establish that its customer lists were generated through the company’s “ingenuity, time, labor and expense of the owner,” then there is a greater chance that a court will find such a list to be a “trade secret” and preclude former executives from soliciting customers using such a list.
In the ER case, the court ultimately concluded that the parties’ evidence was in such conflict that the court could not decide in favor of ER and against its former executives at the preliminary injunction stage.

GUARDING COMPANY TRADE SECRETS FROM DEPARTING EXECUTIVES

The ER case involved former executives who apparently did not sign employment agreements. Thus, much of the evidence submitted to the court in that case sought to prove what was, or was not, “trade secrets” of the company to which the employees were not entitled.

Companies can better protect their interests by specifying in employment agreements which assets the company considers to be trade secrets. Customer lists generated through company resources, for example, can be specifically listed as a trade secret. A contractual provision – while probably insufficient standing alone – could provide a court with “the hook” to find that such a list cannot be used by former executives to solicit the company’s clients.

Again, it’s important to remember that in California employees have the right to obtain new work. That right makes courts wary of enforcing any limitations on executives that only seek to improve their careers. Nevertheless, while there are substantial limits on what companies can do to prevent executives from competing against them, companies should remain vigilant in identifying information it views as trade secrets and preventing employees from using those trade secrets to compete against them in the future.