In yet another troubling development for California employers, a Court of Appeal recently 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.
In Silguero v. Creteguard, Inc., 2010 WL2798222 (Cal. Ct. App. July 30, 2010), the plaintiff, Rosemary 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 informed Silguero that it believed the non-compete agreement was unenforceable but, out of “respect” for FST, it was terminating Silguero. Silguero sued Creteguard for wrongful termination in violation of public policy.
Creteguard argued that there was no clearly delineated public policy prohibiting a subsequent employer from honoring a non-compete/confidentiality agreement entered into by an employee and a former employer, and that any restraint in trade was committed by FST, not it.
The Court rejected this argument and took the opportunity to reaffirm California's strong stance against non-compete agreements. The Court reiterated that Business & Professions Code 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. 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.
When confronted with a request or demand from a former employer to honor a non-compete agreement, California employers should not respond by terminating the subject employee unless they are confident that the non-compete agreement is actually enforceable under California law. While enforceability is less clear when agreements not to compete are signed as part of the sale of a business, when entered into outside of California, and where choice of law provisions designate other state laws as controlling, confidence in the applicability of such as exception is likely to be rare. Therefore, California employers should seek legal guidance when considering an applicant who is subject to an agreement not to compete.