California employers are often concerned about their ability to prevent an employee from competing against the company, or soliciting customers or employees. In addition, employers are concerned about competitors soliciting its employees. Employers must be careful not to violate Section 16600 of the Business and Professions Code ("B&P Code) in attempting to implement or enforce non-compete and non-competition.
The B&P Code prevents any contractual provision that restrains a person's ability to engage in their profession. Exception is made for the person who sells his/her interest in a business. Part of the value of the sold business is the retention of clients. If the seller competes against the buyer of the business and solicits clients, then the value of the business is substantially harmed. But few situations fall within this exception.
Silguero v. Creteguard, Inc. (2010) 187 Cal.App.4th 60, is an instructive case on the effect of non-compete provisions . The plaintiff worked for Floor Seal Technology ("FST") as an inside sales rep. She signed a confidentiality agreement providing that she would not engage in sales activities for 18 months after leaving the company.
Shortly after being fired, Ms. Silguero found employment with Creteguard. However, FST contacted Creteguard and informed it of the confidentiality agreement with the non-compete agreement. Creteguard did not believe the non-compete was legal, but fired Ms. Silguero anyway. Ms. Silguero sued Creteguard for wrongful termination.
The Court of Appeal held that a worker can maintain a cause of action against his/her employer for firing him/her due to an illegal non-compete provision. To do so violates public policy by limiting a person's mobility and right to engage in a lawful profession.
VL Systems, Inc. v. Unisen, Inc. (2007) 152 Cal.App.4th 708 also provides guidance on what an employer can and cannot do in implementing non-compete provisions. VLS entered into an agreement to provide about 16 hours of computer services for Star Trac. The agreement stated that Star Trac would not hire a VLS employee unless it paid VLS 60 percent of the employee's first year salary.
After the job was complete, Star Trac advertised for an IT position. A VLS employee who had not worked on the Star Trac project applied, and was hired. VLS demanded that Star Trac pay it $60,000.
The Court of Appeal invalidated the agreement, concluding that it was harsh, oppressive and over broad, in violation of 16600. The Court took no position on whether a more narrowly-drafted provision would be viable under section 16600.
I personally believe that in the correct circumstances, a narrowly-drawn provision prohibiting a customer from hiring your employee can be justified and permissible under section 16600. However, a business must carefully review its circumstances and the justification for such a provision. If reasonable, the court is more likely to uphold the agreement.