California Court Finds Employer May Be Liable For Honoring Rival's Non-compete Agreement

A recent California Court of Appeal ruling creates a Hobson's choice for employers who are advised that an employee has signed a non-compete agreement with a former employer.  In Silguero v. Creteguard, Inc., 2010 WL2798222 (Cal. Ct. App. July 30, 2010), the Court held that employers may be liable if they terminate an employee on the grounds that he or she has executed an unenforceable non-compete agreement with a former employer.  Therefore, employers are now faced with retaining the employee and risking the threat of a lawsuit by the former employer, terminating the employee and facing a lawsuit for wrongful termination, or limiting the new employee's duties so as to avoid litigation. 

When confronted with a litigation threat by a former employer based upon such an agreement, employers must avoid terminating the subject employee in response, unless they are confident that the non-competition agreement is enforceable under California law.  Given California courts' reluctance to enforce such agreements based upon California Business & Professions Code §16600, such confidence will be rare. 

Silguero had signed a non-compete agreement with her original employer Floor Seal Technology ("FST") that prohibited her "from all sales activities for 18 months following either departure or termination."  After FST terminated Silguero, she was hired by Creteguard.  FST contacted Creteguard and requested "cooperation" in enforcing the non-compete agreement.  In response, Creteguard wrote that it believed the non-compete agreement was unenforceable but, "out of respect for" FST, Creteguard would terminate Silguero.  Upon termination, Silguero sued Creteguard for wrongful termination in violation of public policy.

The Silguero court explained that Section 16600 expresses a "settled legislative policy in favor of open competition and employee mobility," and that "the interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers."  The court noted the decision in VL Systems, Inc. v. Unisen, Inc., 152 Cal.App.4th 708 (2007), which had held that no-hire agreements between competitors are unenforceable.  Here, the court found that the agreement to terminate Silguero, if due to the non-compete agreement, was tantamount to a no-hire agreement, would effectively provide a "back door method to enforce an non-compete agreement barred by Section 16600, and would thus violate the public policy articulated by Section 16600.  Thus, if Silguero could prove that she was terminated based solely due to the non-compete agreement, Creteguard would be liable under the tort of wrongful termination in violation of public policy.

When hiring personnel, employers should identify and carefully examine potential enforceability of any non-compete clauses signed with prior employers.  For example, under the California statute, some non-compete agreements may be enforceable if executed in conjunction with the sale of a business.  If such agreements exist and enforceability is uncertain, employers may wish to prepare contingency plans for alternative or narrower duties if enforcement is threatened after hire.  The Silguero decision makes clear that employers will not have the simple (if unfortunate) option of simply terminating employees when litigation is threatened by a former employer.

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