California courts have repeatedly refused to enforce noncompete agreements. Now, a new California appeals court decision upholding a whopping $1,080,000 punitive damages award shows the high price you can pay for firing an employee who won’t sign a noncompete agreement.
Out-Of-State Employer Uses Noncompete Clause
Aetna Inc. merged with U.S. Healthcare, a company headquartered in Pennsylvania, to form Aetna U.S. Healthcare. Anticipating staff turnover, the new company asked key employees all over the country to sign a noncompete and confidentiality agreement that prevented them from working for a competitor in the same state for six months after termination.
Anita Walia, an account manager in Aetna U.S. Healthcare’s San Francisco office, was told she would lose her job if she didn’t sign the agreement.
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Employee Says Agreement Isn’t Enforceable
Walia—who happened to be a law school graduate—told her managers that noncompete agreements were unenforceable in California. But they said this didn’t matter because the agreement would be interpreted under Pennsylvania law.
Walia’s lawyer then sent a letter to Aetna USHC’s president informing him that covenants not to compete were unenforceable in California, and that the company could be liable for terminating or demoting employees for not signing one. Aetna USHC responded that it believed the agreement complied with California law. As an alternative to signing the provision, Aetna offered Walia an underwriter job, which she declined. Aetna then fired Walia for not meeting a requirement of her position—to sign the agreement.
Walia sued Aetna, and a jury awarded her $179,000—and tacked on $1,080,000 in punitive damages. Aetna appealed.
Court Says Agreement Is Illegal
A California Court of Appeal ruled that the agreement violated a California statute prohibiting contracts that restrain a person from engaging in a lawful business or profession. The court noted that such an agreement may be enforceable if the restraint is extremely narrow. But the restraint here was broad, prohibiting Walia from working as a salesperson for most employers in the California health care industry. The court also pointed out that the noncompete clause wasn’t necessary to protect Aetna’s trade secrets because the agreement addressed this concern in separate provisions.
Termination Violates Public Policy
Aetna also argued that even if the agreement was invalid, Aetna wasn’t liable for terminating Walia for refusing to sign it. But the court found that terminating Walia for not signing the agreement violated California public policy banning noncompete provisions. Thus, the court upheld the jury’s award.
Use Caution
This case demonstrates that California courts are not letting up in their aggressive stand against noncompete agreements, including those by out-of-state employers. Some limited noncompete provisions that don’t restrain an employee from pursuing an entire type of business or profession have been upheld, such as a ban on soliciting business from the employer’s customers for a limited time after termination. And you can bar an employee from working for a competitor while also working for you. But it could be a very costly mistake to terminate employees for refusing to sign noncompete provisions.
The ban on noncompete agreements, however, doesn’t mean you have to leave your trade secrets vulnerable. You can still require employees to sign confidentiality agreements promising not to disclose sensitive information to a competitor while on the job or after leaving your employ. And remind employees in exit interviews of their obligation not to reveal confidential information. If a former employee who had access to sensitive material goes to work for a competitor, you can put the new employer on notice that you will act to protect your trade secrets and request that the employee be assigned to work unrelated to their former job.