In Silguero v. Creteguard, Inc., No. B215179, (decided July 30, 2010), a California Court of Appeals held that a terminated employee had a viable claim for wrongful termination in violation of public policy against the employer who terminated him in accordance with a prior employer’s noncompete agreement with the employee. The appeals court reversed a lower court decision dismissing the action for wrongful termination against Creteguard, Inc., the subsequent employer.
The employee’s noncompete agreement with FST, the prior employer, prohibited him “from all sales activities for 18 months following either departure or termination.” Creteguard hired the employee shortly after FST terminated him. FST then contacted Creteguard and requested the cooperation and participation of Creteguard in enforcing its noncompete agreement. Creteguard fired the employee out of “respect and understanding with colleagues in the same industry,” notwithstanding its belief that “non-compete clauses are not legally enforceable here in California.”
Under the California Supreme Court case Tameny v. Atlantic Richfield Co., (1980) 27 Cal.3d 167, while employers have the power to terminate employees at will, employers may not terminate an employee for a reason that is contrary to public policy. The court identified relevant public policy in Business and Professions Code §16600, which states that, “except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” The court characterized this section as a legislative declaration of California’s “settled legislative policy in favor of open competition and employee mobility.”
Creteguard argued that “there was no clearly-delineated public policy prohibiting a subsequent employer from honoring a putatively valid non-compete/confidentiality agreement entered into by an employee and a former employer,” and that any restraint of trade was committed not by Creteguard, but by FST. Creteguard further argued that its conduct, “in an abundance of caution,” was designed not to invite a lawsuit by FST “for a then-unsettled issue of whether such an agreement was enforceable.” The court disagreed, finding that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.”
While Creteguard attempted to argue that the court’s application was completely novel and would impermissibly expand the scope of §16600, the court found Creteguard’s actions similar to those of an employer in VL Systems, Inc. v. Unisen, Inc., (2007) 152 Cal.App.4th 708. In that case, two employers entered into a contract in which one employer agreed that it would not hire any employees from the other employer for 12 months , but that if it did, it would pay an amount equal to sixty percent of the annual compensation of the employees to the other employer. In addressing the issue of “whether two parties can agree on a no-hire provision as a matter of contract,” the VL Systems court decided that such an “understanding” between two employers would impermissibly allow them to “accomplish by indirection that which [they] cannot accomplish directly.”
Drawing a parallel to VL Systems, the Court of Appeals held that the “understanding” between FST and Creteguard was tantamount to a no-hire agreement and void and unenforceable under §16600. Instead of permitting claims exclusively against FST, the party responsible for the unlawful termination policy, the court found that permitting a claim against a subsequent employer like Creteguard would further the interests of employees in their own mobility and betterment.
Based on the court’s reasoning, employers could face liability for acting in accordance with another employer’s unlawful termination policy.
If you have any questions about this decision or other issues related to hiring employees who are subject to post-termination agreements with their former employers, please contact any member of Baker Hostetler’s Employment and Labor or Noncompete and Trade Secrets teams.
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