‘No competition’ covenants are frowned upon
If your boss asks you to sign an agreement that if you leave the business
you will not work for a competing company, would you sign it? Anita Walia
answered that question – in the negative. Here’s her story.
Aetna merged with U.S. Healthcare to form Aetna U.S. Healthcare. Logical
name. As part of the merger, Aetna’s employees were required to sign a
“Non-Compete and Confidentiality Agreement” which prevented employees, for a
period of six months after departing from Aetna, from working for a
competitor in the same state, in this case California.
Walia, a law school graduate who never practiced law (usually that means
someone who failed the bar exam), did her homework and determined that the
Non-Compete Agreement was “pretty much unenforceable in California.” She
enjoyed her job and received “very good” job performance ratings and refused
to sign the Agreement. She was promptly fired for “failure to meet the
requirements of your position.”
She felt “blindsided” especially since her lawyer had written to Aetna
managers up the corporate chain, including the new CEO, informing them
non-competition agreements are unenforceable in California.
RESTRAINT OF TRADE
Business and Professions Code section 16600 provides, “[E]very contract by
which anyone is restrained from engaging in a lawful profession, trade, or
business of any kind is to that extent void.”
California courts have upheld this law since 1872. As the Walia Court
wrote, “it represents the strong public policy of the State of California
that the interest of the employee and his own mobility and betterment are
deemed paramount to the competitive business interests of the employers.”
In short, agreements requiring employees to refrain from working for any
competitor after their employment is terminated are against public policy
The two exceptions to the general California rule are that the buyer of an existing business may require that the seller not compete with the buyer, and a partnership may prevent a departing partner from competing after the partnership dissolves.
In those two situations, a person can be prohibited from competing, but
neither helps Aetna.
Walia felt so strongly she sued Aetna U.S. Healthcare (naturally) claiming
she was wrongfully fired for refusing to sign a non-competition agreement
against public policy. It wasn’t simply a case of being prohibited from
passing on “trade secrets,” which she was willing to sign.
The jury awarded Walia $54,000, plus $125,000 for emotional distress and
$1,000,000 in punitive damages. The “punies” required her to prove that
Aetna had been guilty of oppression, fraud or malice. Oppression was
defined for the jury as “despicable conduct that subjects a person to cruel
and unjust hardship in conscious disregard of that person’s rights” and
malice is defined as “despicable conduct which is carried on by the
defendant with a willful and conscious disregard of the rights or safety of
The Court of Appeal upheld the jury’s award and found that employee
non-compete agreements have always been unenforceable in California, a fact
made clear to, but ignored by Aetna.
This was an expensive, dumb lesson for Aetna U.S. Healthcare.
Even I know
employee non-compete agreements are unenforceable in California.
Jim Porter is an attorney with Porter ! Simon, with offices in Truckee,
South Lake Tahoe and Reno.
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