May 26, 2020

The Point Of An Unenforceable Noncompete May Be Very Sharp Indeed

Writing for Mother Jones, Kevin Drum recently asked “What’s the point of an unenforceable noncompete agreement?”  He posits two possible answers:

First, it’s just boilerplate language they don’t really care about but left in just in case.  The second is that they find it useful as a coercive threat.

UCLA Law School Professor Stephen Bainbridge picked up on Mr. Drum’s post and quoted the following from an article by NYU Law School Professor Cynthia Estlund:

Even a manifestly invalid non-compete may have in terrorem value against an employee without counsel. Some employers insert non-compete covenants as near-boilerplate in employment agreements for a wide variety of positions, with little regard to the particulars of the position or to whether employees are privy to protectible information. As far as the law is concerned, employers risk nothing with that sort of overreaching (though the market might sometimes exact a price), and they might succeed in keeping employees from leaving and moving to competitors when they are entitled to do so.

Cynthia L. Estlund, Between Rights and Contract: Arbitration Agreements and Non-Compete Covenants As A Hybrid Form of Employment Law, 155 U. Pa. L. Rev. 379, 423 (2006).

Neither Professor Bainbridge nor Professor Estlund addressed California law specifically.  So, I will.  California Business & Professions Code Section 16600 declares agreements not to compete void unless they fall within a statutory exception.  But California’s hostility to covenants not compete doesn’t end there.

Section 16600 doesn’t answer the question of what’s the harm in asking for an unenforceable covenant?  Walia v. Aetna, Inc., 93 Cal. App. 4th 1213 (2001) does.

Walia involved an employer who asked its employees to sign what turned out to be an unenforceable noncompete agreement.  A jury found that the employee had been terminated for refusing to sign and awarded $ 54,312 in compensatory damages, $ 125,000 in emotional distress damages and $ 1.08 million in punitive damages and the Court of Appeal upheld the judgment.

I cite Walia as an example of what could happen and not as legal precedent.  The Supreme Court granted review of the Court of Appeal’s decision, Walia v. Aetna, Inc., 41 P.3d 548 (2002).  That resulted in depublication of the Court of Appeal’s opinion (which in any event the Court of Appeal had certified only for partial publication) pursuant to Cal. Rules of Court Rule 8.1105(e).  Eventually, the Supreme Court dismissed its review, Walia v. Aetna Inc., 66 P.3d 717 (Cal. 2003).

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP


About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...