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Employer Who Honors Invalid Non-compete Agreement may be Liable for Damages in California


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Nuyen

By Max Nuyen

 

Enforcing the unenforceable
A California court of appeals addressed the novel issue of what happens when an employer in California honors an invalid non-compete agreement between a new employee and the prior employer.  A salesperson had worked for a floor sealing company for several years, when the company requested she sign a non-compete agreement restricting her from working for a competing company for 18 months following her employment.  The salesperson signed the agreement, fearing she would be terminated if she did not comply.  Several months later, the floor sealing company dismissed the salesperson from her job.

The salesperson quickly found employment with a competing company.  When the first floor sealing company got wind of the salesperson’s new job with the competitor, it sent a letter to the competitor advising of the non-compete agreement it had in effect with the salesperson.  The letter also requested the competitor honor the non-compete agreement by terminating the salesperson’s employment.  Even though the competitor knew the non-compete agreement was invalid and unenforceable under California law, it complied with the letter because it did not want to harm its relations with the first floor sealing company.  The salesperson then sued the competing company for unlawful termination.

Violation of public policy
In its defense, the competitor argued the salesperson could not pursue her lawsuit because California law did not recognize a cause of action for terminating an employee based on a non-compete agreement, particularly because the competitor was not a party to the agreement.  The appellate court considering the case disagreed.  The court explained there are longstanding public policy grounds for invalidating non-compete agreements which would essentially be ignored if an employer could terminate an employee based solely on an invalid agreement.  As such, the salesperson’s termination did not just affect her, but the public at large because it implicated the rights of all workers to be free from unlawful non-compete agreements.  Accordingly, the court found the competing company was liable for a termination in violation of public policy.

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