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‘No competition’ covenants are frowned upon

LAW REVIEW

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 MERGER




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.

NON-COMPETE

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

and void.

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.

$1,000,000

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

others.”

RULING

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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