Co-authored by Ted A. Gehring.

On July 30, 2010, in Silguero v. Creteguard, Inc., the California Court of Appeal (2nd District) held that an employee could state a claim for wrongful termination against her subsequent employer when that employer terminated her after having been informed by her former employer that the employee was subject to a non-compete clause.  The decision will have important consequences for companies with California employees in industries where non-competition and non-solicitation agreements are common.

The plaintiff, Rosemary Silguero,  began employment with Floor Seal Technology Inc. (“FST”)  in 2003 as a sales representative.  In 2007, FST threatened to terminate her employment unless she signed a confidentiality agreement which contained a non-competition clause that prohibited her from all sales activities for 18 months following either her departure or termination from FST.  Silgureo’s employment was subsequently terminated by FST.  She was then hired by Creteguard Inc.  FST contacted Creteguard requesting its cooperation in enforcing the confidentially agreement.  Creteguard then terminated Silguero’s employment, citing the non-competition clause.  Notably, in terminating her, Creteguard acknowledged the invalidity of the non-competition agreement, but noted it was terminating Silguero "to keep the same respect and understanding" with Creteguard’s "colleagues" in the same industry.

Silguero filed suit against Creteguard, alleging wrongful termination.  She also sued FST in a separate lawsuit, alleging that FST had intentionally interfered with her contract with Creteguard.

Silguero contended that the non-competition agreement with FST was void under California Business and Professions Code Section 16600 and that her termination by Creteguard pursuant to that agreement was against public policy.   Creteguard demurred, arguing that that there was no clearly delineated public policy prohibiting an employer from honoring a non-competition agreement by an employee and a former employer.  Creteguard argued that if there was any violation of public policy, the violation was by FST.  The trial court granted Creteguard’s demurrer, finding it was not against public policy for a subsequent employer to honor a previous agreement entered into by an employee and former employer. Silguero appealed.

On appeal, the Court of Appeal reversed, holding that Silguero’s allegations supported a claim for wrongful termination pursuant to Tameny v. Atlantic Richfield.  In reversing the ruling of the trial court, the Court held that Section 16600 was a clear legislative declaration of a fundamental public policy that forbid discharge based on a non-competition agreement.  The Court of Appeal did not address Silguero’s claims against FST.

Creteguard argued that, notwithstanding the legislative policy against non-competition agreements, nothing in Section 16600 evidenced any legislative intent to impose third-party liability.  Imposing liability on Creteguard for a violation of Section 16600, Creteguard argued, went beyond the legislative intent evidenced by Section 16600.  The Court of Appeal disagreed, noting that California courts had previously rejected as unenforceable "no-hire" agreements between employees.  The Court of Appeal found that Creteguard’s desire to keep an "understanding" with its competitors in the industry operated as a no-hire agreement.