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Covenants not to compete

While not always, non-compete agreements, sometimes called "covenants not to compete," often appear in the employment agreement context. They are typically intended to prevent an employee from accepting later employment with a competitor of the employer within a certain geographical area and for a certain amount of time.  Unfortunately, while employers like these provisions, they often lead to employment litigation. In interpreting these agreements, courts in most jurisdictions try to strike a reasonable balance in which the employer is allowed to place some restrictions on the subsequent employment of its employee, so long as the restriction is not unreasonable in time and geographical scope, does not create an undue hardship, and is aimed at protecting a legitimate interest of the employer. Not surprisingly, California courts strike a "balance" that is heavily tilted in favor of the employee.

Under California Business and Professions Code Section 16600, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." From the enactment date of the statute in 1872 until the present, California courts have been consistent in explaining that Section 16600 evidences a strong public policy of the state of California that the interest of the employee in his or her own mobility and occupational progress are superior to the competitive business interests of employers.

Based on the existing California law, to the extent that an employer has a typical non-compete agreement with an employee, the chances are overwhelming that the agreement will not be enforceable. However, unenforceability may be the least of an employer's worries in cases involving these agreements. For example, the California Court of Appeals for the Second District recently decided the question of whether a terminated employee had a viable claim for wrongful termination when the termination was based upon a reason contrary to public policy in Silguero v. Creteguard, Inc. (2010) 187 Cal. App. 4th 60. The Silguero case involved three parties: the employee (Rosemary Silguero), company one (Floor Seal Technology, Inc., "FST"), and company two (Creteguard, Inc.). Silguero originally worked for FST as a sales representative. Years after she started work, FST threatened to fire Silguero unless she signed a confidentiality/non-compete agreement. Silguero signed the agreement but was soon terminated by FST. Soon thereafter, Silguero was hired by Creteguard. But, within one month of starting her employment, Creteguard learned that she had signed a non-compete with FST, so Creteguard informed Silguero it would have to terminate her. Creteguard did not believe that the non-compete agreement was enforceable in California but wished to keep "the same respect and understanding with colleagues in the same industry." Silguero brought suit against Creteguard for wrongful termination alleging that Creteguard was seeking to enforce an illegal non-compete agreement which was void under Section 16600. Creteguard argued that there was no public policy prohibiting asubsequent employer from honoring a non-compete agreement entered into by an employee and her former employer. The Court disagreed. It held that Creteguard's "understanding" and enforcement of another company's non-compete agreement was tantamount to a no-hire agreement which is prohibited in California. So, post-Silguero, the new wrongful termination rule in California is that any "understanding" that is in essence a non-compete agreement is void under Section 16600 because it would unfairly limit an employee's mobility the same way that a no-hire contract would.

Based on the foregoing, it seems that non-compete covenants, at least in California, will not be enforceable (although employers should always consult legal counsel to review the specific language of any covenant). This is good news for an employee subject to a non-compete who wishes to change jobs, and it is equally good news for an employer who wishes to hire such an employee. Not infrequently, we are asked by clients seeking to hire a new employee what, if any, the effect of a non-compete covenant signed by the prospective employee will be on the prospective employer. Because, as discussed above, the covenants are generally illegal and thus unenforceable against the employer, the prospective employer cannot be held liable for hiring an employee who has entered into a non-compete agreement with his or her past employer.

Note: This posting is intended only as background materials for informational purposes. It does not constitute legal advice. It may not apply to your specific situation or may be incomplete for your purposes. It is not intended to provide legal advice nor create an attorney-client relationship.

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