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| Between a Rock and a Hard Place: Firing an Employee for Refusing to Sign a Non-compete There used to be no appreciable legal risk associated with presenting employees with non-compete agreements that included very broad restrictions and choosing to fire them if they refused to sign. Employers have been relying on the fact that, in many states, courts will simply narrow or "blue pencil" an overly broad, and otherwise unenforceable, non-compete agreement. However, a number of recent California court decisions should cause employers to think twice about insisting that an employee sign an overly broad non-compete agreement. In these recent California cases, the courts have concluded that an employer may be held liable for monetary damages for firing an at-will employee due to the employee's refusal to sign a non-compete that the court ultimately deems was overbroad. These decisions seem to be in conflict with the general rule applicable in most states that an employer has the right to terminate an at-will employee for a good, bad reason, or even no reason so long as the reason is not unlawfully discriminatory. The courts' reliance on an arguably amorphous legal principle called "public policy" in these California cases foreshadows a potential erosion of the at-will doctrine as we have known it. An at-will employee generally may not be terminated for a reason that contravenes public policy. Most state courts consider state constitutions, statutes and administrative regulations to be valid sources of public policy. In the California cases, the employers' liability for terminating an employee in violation of public policy was premised on a California statute that provides "every contract by which anyone is restrained from engaging in a lawful profession, made or business of any kind is to that extent void." These courts held an employee might have a claim for wrongful discharge if he or she was fired for failing or refusing to sign a non-compete that violated the California statute. The most significant aspect of these cases is that the courts concluded that at-will employees may seek "tort type" damages, including punitive damages and damages for emotional distress, if they demonstrate that they were fired for refusing to sign an "illegal" non-compete agreement. A recent illustrative case is D'Sa v. Playhut, Inc. In D'Sa, the defendant Playhut presented the plaintiff-employee, who was employed at-will, with a confidentiality agreement that included a non-compete clause. The clause provided in relevant part that: the employee will not render services, directly or indirectly, for a period of one year after separation of employment with Playhut to any person or entity in connection with any Competing Product... The clause further provided that: the employee agrees to notify the Company in writing for a 5-year period after termination of the names and addresses of any new employer within 30 days of accepting such new employment. The employee in D'Sa refused to enter into the non-compete and as a result, was fired. The employee sued, alleging that the termination of his employment contravened California public policy (as codified by Section 16600 of the California Business and Professions Code). The California appellate court agreed. The defendant-employer, Playhut, had unsuccessfully argued that the agreement was not "illegal" in its entirety under Section 16600 because the agreement included a severability provision under which some of its provisions were enforceable even if the Court found others to be unenforceable. The court reasoned that the employer should not be allowed to use "Draconian" clauses to resurrect an otherwise illegal contract. A federal court in California recently applied the same reasoning in Catona v. Aetna U.S. Healthcare, Inc. There, the court also notes that the employer, not the employee, bears the burden of acquainting itself with the permissible scope of non-competes and the consequences of presenting an impermissibly broad covenant to an employee. Seventeen states other than California have enacted statutes in which non-compete agreements that are not connected to the sale of a business are "presumed" to be invalid. In these states, the D'Sa and Aetna decisions could have significant precedential value. In jurisdictions where there is no similar statute, such as New York, New Jersey and Illinois, we expect these decisions to have less precedential value. However, even in these states, employees may rely on other statutory or judicial sources for the same public policy arguments successfully advanced in California. Thus, even in these states, it would be prudent for employers to scrutinize the scope of a non-compete agreement before firing an employee who refuses to sign it. © 2001 Davis & Gilbert LLP |
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