Companies May Be Liable for Honoring Illegal Non-Compete Agreements of Former Employers
Last week a California court expanded the reach of California's public policy against non-compete agreements by holding that an employer may be held liable for terminating an employee based on a desire to honor the employee's illegal non-compete agreement with a former employer. Thus, even though the new employer did not draft the non-compete agreement and was not a party to the non-compete agreement, the new employer could still be held liable to the employee on a wrongful termination claim simply because it honored the agreement.
In the case at issue, Silguero v. Creteguard, Inc., the plaintiff, a salesperson, signed a confidentiality agreement with her then employer, FST, that precluded her from working in sales for eighteen months following termination from FST. Shortly thereafter she was terminated and found employment with Creteguard. FST contacted Creteguard and asked it to honor the confidentiality agreement. Creteguard terminated Plaintiff's employment in a writing that stated “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.”
The plaintiff sued Creteguard for wrongful termination in violation of California's public policy against non-compete agreements. Creteguard tried to get the case dismissed, arguing that it could not be held liable for another company's illegal non-compete agreement. The trial court agreed with Creteguard and dismissed the case. However, the plaintiff appealed and the appellate court agreed with the plaintiff. The court reasoned that even though Creteguard was not a party to the illegal non-compete agreement itself, Creteguard's honoring of the agreement (while knowing it was illegal) was tantamount to a no-hire policy or agreement whereby Creteguard agreed not to hire FST's employees. The court explained that such an agreement unfairly limits the mobility of employees and would be void and unenforceable under California law even if standing alone.
Employers should proceed with caution when faced with requests from an employee's former employer to honor the terms of a non-compete or similar agreement containing restrictions on the employee's work-related activities. Assuming the Silguero case is not further appealed and remains good law, this opens to the door to potential litigation and liability against companies who refuse to hire a prospective employee (or who terminate a current employee) based on the employee's non-compete agreement with a prior employer.