Quirky Question # 160:

We are a nationwide company with offices and employees in nearly every state. One of our primary growth areas is California. We understand that California courts are generally inhospitable to post-employment restrictive covenants, including non-competes. But, we are trying to have uniform policies throughout our organization. Consequently, we still have confidentiality and non-compete language in our employees’ contracts, even for those who work in California.

Recently, one of our employees left our company and joined a competitor, also located in California. We understood that it would be difficult to enforce the non-compete so we simply called our competitor and pointed out our concerns regarding both our non-disclosure and our non-compete obligations. We advised our competitor that we would appreciate it if they would abide by the spirit of our non-compete and noted that we would reciprocate if provided the opportunity with regard to our competitor’s employees.

Our competitor terminated our ex-employee soon thereafter. Her lawyer has now written us to state that we have violated public policy. What is he talking about? We did not fire the employee. We just had a friendly chat with our competition.

Roy’s Analysis:

I understand your concerns but I do not believe the solution you have devised is prudent. As a preliminary observation, your perception that California courts are “generally inhospitable” to post-employment restrictive covenants is accurate (though a bit understated). The California legislature has made abundantly clear that, except in very limited circumstances – typically linked to the sale of a business – non-competes are not enforceable in California. See California Business and Professions Code § 16600. Both in recognition of that legislative pronouncement, and even before the statute was passed, California courts had rejected non-competes as an undue restraint on trade and an inappropriate limitation on an employee’s job mobility. See, Edwards v. Arthur Anderson LLP, 44 Cal.4th 937 (2008).

Given the statutory and judicial repudiation of post-employment restrictive covenants in California, I recommend against devising a way to circumvent California law. Putting it bluntly, when you state that you hope a competitor would “abide by the spirit of [your] non-compete” and not hire your employee, aren’t you really asking your competitor to violate California law? And, when you link your request to a promise of reciprocity, aren’t you really saying that if your competitor violates the law by refusing to hire your former employees, your company will collude with them to do the same? In short, if they violate the law to benefit your organization, your company will violate the law to benefit their organization.

This approach is ill-advised. I recommend that you abandon it.

You also note in your question that following the departure of one of your employees, you contacted your former employee’s new employer to express your concerns. Soon thereafter, the new employer terminated the employee’s employment, precipitating the correspondence you recently received from your ex-employee’s attorney. You inquired about the threatened claim of wrongful termination in violation of public policy. Simply stated, as employment law evolved in the last several decades, courts grappled with the somewhat amorphous claims asserted by many plaintiff-employees of “wrongful discharge”. Recognizing that this concept was seemingly unbounded, most courts in most jurisdictions (though not all) have rejected a pure “wrongful discharge” theory. Instead, the courts have linked the wrongful discharge theory to a violation of some well-defined public policy. Often, the policy is codified in a state or federal statute or Constitution.

Here, presumably, your ex-employee’s argument would be that the California legislature has repudiated post-employment restrictive covenants, except in the narrowest of circumstances. This “public policy” has been recognized by the California courts, from the Supreme Court to the lower courts. Your former employee will contend that your presumably successful efforts to persuade one of your competitors to disregard this policy for your two companies’ mutual benefit and in derogation of your ex-employee’s rights violates the public policy of the state. As the case below illustrates, your former employee has a compelling argument.

The recent case of Silguero v. Creteguard, Inc., No. B215179 (Cal. Court App. July 30, 2010), closely parallels the fact pattern of your question. In Silguero, the plaintiff worked as an in-house sales representative for Floor Seal Technology, Inc. (FST). At some point in Silguero’s employment, FST required her to sign a “confidentiality” agreement which contained a provision prohibiting her from “all sales activities for 18 months following either departure or termination.” A few months after Silguero signed this contract, Silguero terminated her employment.

She soon found another job with Creteguard. FST, however, then contacted Creteguard and “requested cooperation and participation of [Creteguard] in enforcing the confidentiality agreement, including those provisions prohibiting Silguero from all sales activities for 18 months . . ..” Based on Creteguard’s request, FTC terminated Silguero, even while advising her that it did not believe the non-competition clause was enforceable under California law.

Silguero sued Creteguard for various claims, including a claim for wrongful discharge in violation of public policy. The trial court dismissed this claim but the appellate court reversed. The Silguero court began its analysis with a brief review of the California Supreme Court case of Tameny v. Atlantic Richfield Co., 27 Cal.3d 167 (1980), in which California’s high court “recognized that although employers have the power to terminate employees at will, they may not terminate an employee for a reason that is contrary to public policy.” As the California Supreme Court pointed out, the public policy exception must be based on fundamental policies set forth in statutory or constitutional provisions and the policy must be “public” in that it “affects society at large”. In short, the policy has to implicate a public, not merely a private, interest.

With this California decision as the backdrop, the Silguero court found that Section 16600 of the California Business and Professions Code “provides . . . a legislative declaration of fundamental public policy and that Creteguard’s termination of Silguero constituted a wrongful termination in violation of that policy.” This determination was consistent with an earlier determination by the California Court of Appeals that a “no hire” agreement was void against public policy. VL Systems, Inc. v. Unisen, Inc., 152 Cal.App. 4th 708 (Cal. App. 2007). In the VL Systems case, the appellate court found that a mutually agreed upon no-hire provision between a consulting company and one of its clients was void against public policy because it violated § 16600. The VL Systems court found that enforcing the agreement as written would implicate many of the same policies as covenants not to compete, unfairly and impermissibly limiting employees’ mobility.

Relying upon this earlier decision, the Silguero court reasoned that the “understanding” between FST and Creteguard was “tantamount” to the no-hire agreement rejected in VL Systems. As such, it too was void and unenforceable because it limited employees’ mobility. As the court stressed, like the situation in VL Systems, FST should not be able to “accomplish by indirection that which it cannot accomplish directly.”

As these California cases make clear, the discharge of your ex-employee by your competitor would constitute a violation of California’s fundamental and well-defined public policy repudiating post-employment restrictive covenants. This conclusion presumes, of course, that your competitor fired your ex-employee because of your request and promise of reciprocity, and not for some unrelated, legitimate reasons.

A separate question is whether your ex-employee could bring the wrongful discharge claim against your company or whether she only could assert such rights against your competitor. In the Silguero case described above, the employee sued the company that fired her (Creteguard). Note that the claim is “wrongful discharge in violation of public policy.” Inasmuch as your company did not terminate your ex-employee from her second job, she may not be able to assert this claim against your firm. However, given the apparent collusion between your company and your competition, it will not take a particularly creative plaintiff’s attorney to link both companies to the discharge decision under an “aiding and abetting” theory or some other legal analysis.

Moreover, keep in mind that there may be other causes of action that your former employee could assert. For example, Silguero also brought a separate claim for interference with contractual relations against FST. Your ex-employee also would have the opportunity to pursue this claim.

The bottom line is that your company is taking an unnecessary risk by pursuing the strategy you have described. While I appreciate the desire of your firm and many others to have uniform policies, applicable nationwide, the fact is that different states have different, and often inconsistent, employment laws. That is the reality for the multi-state employer. Your company needs to be aware of and respect these differences, both with regard to the policies adopted by your company and the way in which those policies are enforced in different jurisdictions.