Agreements that prohibit an employee from competing with you after leaving your employment are usually illegal. That’s because contracts that prevent someone from engaging in a lawful occupation are against public policy and are void in California. Now a California Court of Appeal has ruled that you can be sued for making it a condition of employment that an employee sign an agreement containing an unenforceable noncompete clause.
Employee Won’t Sign Noncompete Provision
Soon after hiring Richard D’Sa, City of Industry toy manufacturer Playhut Inc. asked him to sign a confidentiality agreement with a noncompete clause. D’Sa refused and the company fired him. The agreement set out both employer and employee rights and responsibilities regarding nondisclosure of trade secrets. The noncompete clause prohibited D’Sa from working for Playhut’s competitors for a year after leaving the toymaker.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
Terminated Employee Goes After Employer
D’Sa sued Playhut for wrongful termination on the grounds that it’s illegal to fire employees for refusing to sign noncompete agreements because they are usually unenforceable in California. Playhut asked the court to throw the case out, arguing that the employment agreement was valid. D’Sa could be fired for refusing to sign, Playhut asserted, because the contract provided that even if some parts were void, the other terms would still be enforced.
Court Says Termination Was Illegal
A California Court of Appeal disagreed with Playhut, allowing D’Sa’s lawsuit to proceed. The court explained that the company’s noncompete provision was void and unenforceable. And, the court said, firing an employee—even one who is at-will—for refusing to sign an agreement that contains an illegal covenant not to compete amounts to wrongful termination in violation of public policy. This is true even if the agreement enables the employer to enforce the terms of the contract which are legal.
Watch Yourself
This case demonstrates the risks of terminating an employee who refuses to sign an employment agreement that includes an illegal noncompete provision. As a consequence, you could face a hefty penalty, including punitive damages.Keep in mind, however, that noncompete agreements are legal in certain limited situations. For example, you can prohibit a current employee from working for a direct competitor at the same time or when an employee has an ownership interest in your business.