©2023 Seyfarth Shaw LLP www.seyfarth.com 2023 Cal-Peculiarities | 341 12.1.6 The ban as applied to settlement agreements Settlement agreements, like contracts generally, are enforceable, notwithstanding California’s ban on noncompete covenants, to the extent that the settlement agreement protects trade secrets. In a settlement of a trade secret lawsuit, the parties agreed to a stipulated injunction by which defendants would refrain from contacting customers on plaintiff’s customer list (allegedly including trade secrets). When a dispute arose about compliance with this stipulated injunction, the plaintiff successfully moved for an order of contempt. The Court of Appeal held that the stipulated injunction was facially valid, as it existed to protect trade secrets.23 12.1.7 The ban as applied to third-party contracts The California ban on noncompete covenants can extend even to contracts to which an employee is not a party, such as “no hire” contracts between two businesses. At issue in one case was a provision in a contract between a consulting firm and its customer that the customer would not hire the consulting firm’s employees for 12 months following the contract’s termination. This provision aimed to protect the consulting firm’s key asset—the expertise of its consultants—by discouraging the firm’s customers from hiring away the firm’s consultants. When the customer breached this provision, the consulting firm successfully sued its customer to recover damages. But the Court of Appeal reversed, reasoning that because “the interests of the employee trump the interests of the employers as a matter of public policy,” “it logically follows that a broad-ranging contractual provision such as the one at issue here cannot stand.”24 The Court of Appeal concluded that “enforcing this clause would present many of the same problems as covenants not to compete and unfairly limit the mobility of an employee who actively sought an opportunity with [the customer].”25 The Court of Appeal allowed that a “more narrowly drawn and limited no-hire provision” might be permissible under California law, but noted that the provision in question covered all hiring (not just solicitation by the customer) and covered all of the consultant firm’s employees (not just those who worked for the customer or those whom the consulting firm even employed at the time). Outweighing this “broad provision” was “the policy favoring freedom of mobility for employees.”26 12.2 Implications for Wrongful Termination California courts have held that where an employee refuses to sign a document containing an unlawful covenant not to compete, the employer violates public policy and incurs tort liability if the employer responds by firing the employee.27 The Court of Appeal has extended that principle to hold that an employer could be liable for wrongful termination if it fired an employee for breaching a noncompete covenant that the employee had entered into with a former employer.28 The Court of Appeal reasoned that the new employer’s decision to fire the employee in those circumstances amounted to enforcing a no-hire agreement between the old and new employers—an agreement that was void as an unlawful noncompete agreement.29 12.3 “No Rehire” Clauses Employment settlement agreements traditionally have provided that the settling plaintiff—now a former employee—would never re-apply for employment, and that the defendant could deny employment to the plaintiff without recourse. Before 2020, such “no rehire” clauses were common even in California, but one case held that in particular circumstances a no-rehire clause could be an unlawful restraint of the former employee’s right to engage in a lawful profession, trade, or business. In a 2015 decision, the Ninth Circuit held that the trial court, which had enforced a settlement agreement with a “no rehire” clause, had abused its discretion by narrowly characterizing section 16600 as applying only to “covenants not to compete,” when section 16600 actually applies more broadly to any contractual “‘restraint of a substantial character,’ no matter its form or scope.”30
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