Court Rules That Firing An Employee Based On A Non-Compete Agreement With Former Employer Violates California Law

August 2, 2010

Summary

On Friday, a California Court of Appeal held that an employer violates California law when it terminates an employee because that employee signed an unenforceable non-compete agreement with a former employer.

Discussion

In Silguero v. Creteguard, Inc, the Court of Appeal broadened the reaches of California's fundamental public policy against employee non-compete agreements.  This case involves two employers, Floor Seal Technology, Inc. ("FST") and the defendant, Creteguard, Inc.  In August 2007, Rosemary Silguero was working for FST as a sales representative.  FST presented Silguero with a confidentiality agreement that prohibited her "from all sales activities for 18 months following either departure or termination [from FST]."  FST told Silguero she would be fired if she didn't sign the agreement.  Silguero signed, and two months later FST terminated her employment.

Silguero quickly found a new job as a sales representative for Creteguard.  Almost immediately, FST contacted Creteguard and requested that Creteguard respect Silguero's non-compete agreement with FST.  In response, Creteguard's CEO terminated Silguero out of "an abundance of caution" to avoid any potential lawsuit from FST.  In his termination letter to Silguero, Creteguard's CEO explained that "although we believe that non-compete clauses are not legally enforceable here in California, [Creteguard] would like to keep the same respect and understanding with colleagues in the same industry."

Silguero sued Creteguard for wrongful termination in violation of public policy, relying on California Business and Professions Code Section 16600 ("Section 16600"), which generally renders non-compete agreements unlawful.  Creteguard argued that Section 16600 should not apply to the actions of a third party, who did not impose the unlawful non-compete agreement on the employee.  The trial court agreed with Creteguard, and dismissed Silguero's complaint.  She appealed.

The Court of Appeal reversed, concluding that Silguero alleged a valid wrongful termination claim.  The Court reasoned that Silguero's interest in employment mobility was protected under Section 16600, and this interest trumped Creteguard's competitive business interests.  Even if Creteguard acted only to protect itself and had no intention to enforce FST's unlawful non-compete agreement, Silguero's complaint alleged an "understanding" between Creteguard and FST that was "tantamount to a no-hire agreement" in violation of Section 16600.  In effect, the Court of Appeal declared that FST should not be allowed to accomplish by indirection that which it could not accomplish directly.

What This Means

This decision could be viewed as limited to its specific facts – Creteguard's termination letter admitted it believed the non-compete agreement was unenforceable, but it nonetheless terminated Silguero to maintain an "understanding" with FST.  On the other hand, this decision has potential far-reaching consequences.  It could be construed to apply to any adverse action which is based upon a concern about being sued by an employee's former employer over an agreement which is unenforceable under Section 16600.  Specifically, it is not hard to see how an employee might seek to apply this case to a company's decision not to hire him or her based on a non-compete agreement with a former employer.

Employers considering not hiring an employee, or terminating a new employee, based on a non-compete agreement with a former employer, should carefully assess the enforceability of the non-compete agreement, and avoid making any decisions based on provisions that are unenforceable under Business and Professions Code section 16600.

This E-Update was authored by Fred Plevin and Greg Halsey.  For more information, please contact Mr. Plevin, Mr. Halsey or any other Paul, Plevin attorney by calling (619) 237-5200.

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