Labor & Employment Law

Employers May be Liable for Honoring An Unenforceable Noncompete Agreement With Prior Employer -- Silguero v. Creteguard, Inc.

California takes a dim view of employee non-competion agreements, which are generally unenforceable and against public policy under Business and Professions Code sec. 16600.  Nevertheless, employers (and especially out-of-state employers) persist in including them in employment contracts under the theory that "it can't hurt" to have them as a deterrent and a potential source of leverage. 

When an employee leaves for a competitor these former employers will often send a sternly worded "cease and desist" letter to the new employer.  It has been widely accepted that this type of letter can carry certain risks for the old employer, such as a claim for intentional interference with contract.  But the recent Second District Court of Appeal decision in Silguero v. Creteguard illustrates that the new employer is also exposed to liability if it responds to the threat by terminating the employee.

The Silguero court began with the substantial body of case law holding that, in California, "the interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers."  Based on this strong public policy the Court determined that any explicit no-hire agreement between the two companies would have been illegal and unenforceable.  The Court further concluded that terminating Silguero "out of respect for" the non-compete agreement with his prior employer was merely achieving the same result in an indirect manner.  As a result, the Court found that if Silguero could prove his allegations, his new employer would be liable for the common law tort of Wrongful Termination in Violation of Public Policy.

The bottom line is that employers should not automatically terminate a new employee merely because he has executed a (presumably unenforceable) non-compete agreement.

Full post as published by California Labor & Employment Defense Blog on August 02, 2010 (boomark / email).