Legal Question in Business Law in California

You don't need a contract provision to protect yourself from this. What the employee did was totally illegal and you should sue them.

They committed a tort (a civil wrong, for which the law provides a monetary remedy). It is called tortious interference with a contract. I would sue and terminate them.

Mr. McCormick doesn't say why it is "totally illegal."

There are three legal concepts that interplay here and need discussion: (1) the right to compete; (2) misappropriation of trade secrets; and (3) tortious interference with contract.

First, California protects the right of an employee or contractor to go into business in competition with an employer. Business & Professions Code section 16601 says that any contract that restricts anyone from engaging in any lawful business, trade or occupation is, to the extent of the restriction, void. So, your instructors are free to start their own teaching businesses in competition with you.

Now, on to the second concept. Trade secrets are valuable property, and subject to laws protecting the owners, just like money, jewelry and cars. Customer lists and information about potential clients can be a trade secret, and in your case probably was. You can better protect yourself by including wording in your contracts with your teachers to the effect that "the identity and instructional needs of the children taught through this school, of their parents, and of the school's prospects, are trade secrets, and are divulged to teachers with the express understanding that they are valuable and not to be divulged or misappropriated." Although you may not "need" such a provision, the law of trade secrets does require that a trade secret owner take reasonable measures to maintain the secrecy or the information may lose its protected status. The applicable law is the California version of the Uniform Trade Secrets Act, Civil Code sections 3426 to 3426.11.

Third, a third party's interference with a contract or economic relationship between two other parties can be a tort. Competition is encouraged, but not to the extent of condoning inducement of breach of contract. Assuming you had a contract with the pupil's parents, even if it were open-ended and cancelable at will, the teacher's actions are very likely grounds for suit alleging tortious interference with contract, and/or possibly interference with prospective business advantage or unfair competition under Business & Professions Code section 17200 or a related section. Your rights under this third concept would arise out of your contract with the parents, and I would suggest you consider whether you would lose too many clients if you firmed up the commitment to give you some exclusivity for a period of time, even for example requiring a 30-day cancellation notice.

This is an incomplete discussion, but a local contract attorney could help you with review of your teacher agreements and also your parent/pupil agreements, and you may wish to contact a litigator about the existing situation.