Non-Compete Agreements with Former Employer Creates Liability for New Employer

This article will feature the implications an employer faces when he/she terminates an employee because the employee is bound by a covenant not to compete drafted by the employee’s former employer.

The issue is especially relevant with employers doing business in California. California law invalidates covenants not to compete under Business and Professions Code section 16600.  Covenants not to compete are not honored in courts because they violate California public policy.

The prohibition against covenants not to compete could subject any employer to liability even though he/she was not a party to the non-compete agreement.  In a recent decision, a California Appeals court reinforced California’s public policy against illegal non-compete agreements by finding a subsequent employer liable for honoring a non-compete agreement with the employee’s former employer.

The new employer not only was not a party to the illegal non-compete agreement, the new employer had nothing to do with its creation.  Irrespective of these facts, the court determined that the new employer could still be liable to the employee for a claim of wrongful termination because it honored the agreement and refused to employ the employee.

In this case, the plaintiff, a salesperson, signed a confidentiality agreement, with her then-employer, which included a provision that precluded her from working in sales for eighteen months following her separation of employment.  After she was terminated, she accepted employment at a new company. When the former employer learned of this, it contacted the new employer and requested that its non-compete/confidentiality agreement be honored.  The new employer did not want to get caught in the middle of this situation and terminated Plaintiff’s employment.

The new employer stated that while it did not believe that the former employer’s non complete agreement was legally enforceable in California, they wanted to “keep the same respect and understanding with colleagues in the same industry.” (Silguero v. Creteguard, Inc.)

The employee sued the “new” employer (Creteguard) for wrongful termination in violation of California’s public policy which expressly provides that non-compete agreements are illegal and unenforceable. The new employer sought dismissal of the case, arguing that it could not be held liable for another company’s illegal non-compete agreement.

On appeal, the court agreed with the employee and stated that even though the new employer was not a party to the illegal non-compete agreement, by honoring the agreement (while knowing it was illegal) the new employer violated California law.

What should an employer in California do?

(1) Inquire whether a potential new employee has signed any Covenant Not to Compete or Trade Secrets Agreement with his/her former employers.

(2) Review any such agreements and proceed with caution with the hiring so that you respect the Trade Secrets but do not respect covenants which violate California law.

If you have any question about the above, or if you are faced with a similar situation, please feel free to contact my San Diego Labor and Employment Office. My San Diego Labor and Employment Office offers free consultation and will clarify any uncertainties regarding covenants not to compete in California.



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