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Covenants Not To Compete May Snag Subsequent Employers: If A Company Terminates an Employee Because the Person Signed an Invalid Non-Compete Agreement with a Prior Employer, It May Create Liability as a Wrongful Termination in Violation of Public Policy
Covenants not to compete are invalid in California, except in very specific circumstances recognized in sections 16600-16602.5 of the Business & Professions Code. The exceptions include cases where a person owns a business and sells goodwill to a successor; or where there is dissolution of a partnership or limited liability company.
As the California Supreme Court made clear in Edwards v. Arthur Andersen, 44 Cal. 4th 937 (2008), unless a non-compete clause falls squarely within one of these exceptions, it is illegal; it cannot be enforced and the employer cannot claim damages or obtain an injunction if an ex-employee opens a competing business or goes to work for a rival firm.
But what if a subsequent employer (the “rival firm” in the example just cited) gets wind of the non-compete clause and fires the employee out of respect for its competitor – all in an effort to maintain peace in the marketplace?
This is exactly what happened in Silguero v. Creteguard, Inc. The court said the termination was wrongful because it had the effect of giving teeth to an invalid covenant not to compete. In such a case, the terminated employee has a cause of action for wrongful termination.
As the Silguero case illustrates, non-compete clauses are still widely used and very much misunderstood.
For your convenience, a complete copy of the court’s opinion is attached.
At Slote & Links we regularly advise both employers and employees regarding various legal issues that arise in the workplace. Feel free to contact us if you need assistance in this area.