WORKPLACE LAW -
Non Competition Agreements
Question:
I plan to hire a manager that works for a competitor. Are there any legal issues I should be concerned about?
Answer:
Yes, there can be legal issues that arise when hiring an employee from a competitor. One such issue involves agreements that the new employee may have entered into with your competitor. Employers sometimes ask employees, either as a condition of employment or as part of a severance agreement, to execute a noncompetition agreement restricting the employee from entering into direct competition against the employer after leaving employment. Employees also often enter into confidentiality agreements and conflict of interest agreements that usually include provisions to protect trade secrets. In a recent high profile case, Hewlett-Packard (HP) terminated its chief executive, Mark Hurd, whom Oracle then hired as its co-president. After Hurd joined Oracle, HP sued him for breach of contract, alleging that by taking the new job he violated his severance agreement, which requires him to protect HP’s confidential trade secret information, and sought an injunction against Oracle from using such secrets. The parties settled, but the case highlights the litigation risks a new employer may face.
In the past, noncompetition agreements were legal as long as the restraints on competition were reasonably limited, for example, in time, scope, and geographic distance. However, in 2008 the California Supreme Court held that most noncompetition agreements are invalid, reasoning that any restraint on open competition or on an employee’s ability to practice his or her profession violates California Business and Professions Code section 16600. Section 16660 provides that “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 decision severely restricted California employers’ ability to require employees to sign noncompetition agreements, except in very limited circumstances.
A recent California Court of Appeals decision, Rosemary Silguero v. Creteguard, Inc. et al., held that even if employers do not enter into invalid noncompetition agreements they can still be liable for trying to enforce them. In Silguero, the plaintiff began work as a sales representative for Floor Seal Technology (“FST”) in 2003. In 2007, FST threatened to fire her unless she signed a noncompetition agreement that prohibited her from engaging in any sales activities for 18 months after leaving FST. She signed the agreement, but FST eventually fired her. She soon began working with Creteguard, an FST competitor. FST asked Creteguard to enforce the noncompetition agreement. Although Creteguard believed that the agreement was unenforceable, it decided to honor FST’s noncompetition agreement and terminate Ms. Silguero’s employment in order to maintain a good working relationship with its industry colleagues.
Ms. Silguero filed a wrongful termination claim against Creteguard. Ms. Silguero alleged that her noncompetition agreement with FST was void under California law, and that her termination by Creteguard was wrongful and against public policy. The trial court dismissed the case based on Creteguard’s argument that FST — not Creteguard — violated Section 16600, and that no public policy prohibits a subsequent employer from honoring a former employer’s noncompetition agreement with the employee. Ms. Silguero appealed, and the Court of Appeals ruled in her favor. The court held that Section 16600 was a clear legislative declaration of a fundamental public policy that forbids termination of employment based on an invalid noncompetition agreement. The court found that Creteguard’s desire to keep a good working relationship with its competitor operated as a prohibited no-hire agreement under Section 16660 because it unfairly limits employee mobility.
In California, an employer may be liable for wrongful termination in violation of public policy when it terminates an employee who entered into an unenforceable noncompetition agreement with her prior employer. It may also be impermissible for an employer to consider a prospective employee’s noncompetition agreement in making its hiring decision. Employers should proceed with caution when hiring an employee who works for a competitor, and be careful not to make any hiring or firing decisions based on an employee’s arguably unenforceable noncompetition agreement with a former employer. Employers should also take steps to ensure that an employee who is a party to a valid confidentiality agreement does not unlawfully use confidential information or trade secrets in the performance of their new job.
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