In October 1999, our Employment Law Commentary discussed Bajorek v. IBM, 191 F.3d 1033 (9th Cir. 1999), a Ninth Circuit case that upheld the enforceability of a limited non-competition clause contained within a stock option agreement. While the Ninth Circuit appears increasingly willing to enforce non-competition agreements, California courts do not seem to be following suit. In fact, in Walia v. Aetna, Inc., a recent San Francisco Superior Court case, the court ruled for the first time that terminating an employee for refusing to sign a non-competition agreement constitutes a violation of California's public policy. In the wake of Walia, California employers must be increasingly mindful of Business and Professions Code § 16600 when making personnel decisions.

Business and Professions Code Section 16600

Although most states will enforce non-competition agreements if they are reasonable, California broadly prohibits agreements that restrict individuals from engaging in competition. As many California employers know, Business and Professions Code § 16600 provides that any agreement that restrains a person from engaging in a profession, trade or business is void. While the Ninth Circuit has been willing to read § 16600 more narrowly, California courts have generally refused to enforce any non-competition agreement that does not fall specifically within one of the exceptions to the statute, which involve the sale of a business or the dissolution of a partnership.

Following more relaxed interpretations of § 16600 by the Ninth Circuit, many commentators have wondered whether California courts might also begin to interpret the statute more loosely. While the issue remains to be resolved at the appellate level, Walia v. Aetna indicates that California trial courts are not changing their interpretation of the statute in the wake of the Ninth Circuit rulings.

Walia v. Aetna

Factual Summary

In 1995, Aetna hired Anita Walia as a Marketing Coordinator in its San Francisco office. In June of 1996, Walia was promoted to the position of Account Representative. At approximately the same time, Aetna decided that it would require all of its employees nationwide who had access to confidential and proprietary information to sign a non-competition agreement. Because Account Representatives were deemed to have such access, in April of 1997 Aetna asked Walia, as well as all Account Representatives employed throughout the country, to sign the agreement.

Aetna's non-competition agreement provided that employees could not compete with the Company, either directly or indirectly, for six month following their resignation or termination. Specifically, the agreement prohibited employees from owning, becoming an employee of, or engaging as a consultant or contractor to any competitor of Aetna engaged in the health care business. Aetna's competitors were defined as health maintenance organizations, point-of-service plans, or preferred provider organizations.

Aetna informed employees that if they did not sign the agreement, it would attempt to reassign them to comparable jobs within the Company. However, employees were notified that if comparable jobs could not be found or if they refused to accept comparable jobs, they would be terminated.

Walia claims that she informed her supervisors that the non-competition agreement was unenforceable in California and that she was not comfortable signing it. She also hired an attorney who informed the Company of California law regarding non-competition agreements. In June of 1997, Walia was terminated along with twenty-five other California employees who similarly refused to sign the agreement. However, over five hundred California employees who signed the agreement remained employed by the Company.

Following her termination, Walia filed suit against Aetna.

The Parties' Arguments

In March of 1998, Walia sued Aetna in San Francisco Superior Court alleging, inter alia, that her termination constituted wrongful termination in violation of public policy. She argued that Business and Professions Code § 16600 represents a fundamental public policy of the State of California and that, by terminating her employment when it had notice of California's prohibition of non-compete agreements, the Company was liable for tortious discharge in violation of public policy.

In its defense, Aetna argued that Walia's wrongful termination claim lacked merit on several grounds. First, Aetna claimed that Walia, an at-will employee, was terminated not for refusing to sign the non-competition agreement, but for refusing to accept a transfer. The Company asserted that Walia, prior to her termination, was offered a comparable job in underwriting which did not require a non-competition agreement. When Walia refused to accept the position, Aetna terminated her. The Company claimed that no public policy prevents an employer from terminating an employee on that basis. Moreover, Aetna claimed that under their policy, an employee who failed to accept a comparable position would be deemed to have voluntarily resigned. Thus, the Company argued, by refusing to accept a comparable position, Walia effectively resigned from her position.

Second, Aetna claimed that its non-competition agreement did not violate public policy. Aetna argued initially that because it never enforced the agreement, its enforceability under § 16600 should not be at issue. Further, it claimed that the agreement was enforceable. It argued that the agreement was limited in scope because it did not completely bar Walia from pursuing her profession and it legitimately protected the Company from disclosure of its trade secrets.

Third, Aetna asserted that § 16600 does not prohibit an employer from asking employees to sign a non-competition agreement and terminating them if they do not. It argued that because Walia's public policy claim was based only on the statute, Aetna did not violate any public policy when it terminated her.

The Decision

Prior to trial, the court issued rulings as a matter of law. It held first that Aetna's non-competition agreement violates Business and Professions Code § 16600. Despite Aetna's claim that the agreement did not completely bar Walia from pursuing her profession, the court found the agreement too broadly drafted to be enforceable under § 16600. The court then ruled that terminating Walia for refusing to sign the non-competition agreement would constitute a violation of California's fundamental public policy.

On December 20, 1999, a unanimous jury, unpersuaded by Aetna's claim that Walia had essentially resigned, found that Walia was wrongfully terminated in violation of public policy and awarded her $1.2 million --$180,000 in compensatory damages and $1,080,000 in punitive damages. Aetna has not yet announced whether it plans to appeal the verdict.

In February, the jury will determine whether Aetna's actions constitute an unfair business practice under Business and Professions Code § 17200.

Significance of Aetna v. Walia

Most notably, the Walia decision indicates that terminating employees for refusing to sign non-competition agreements violates California's public policy, exposing employers to liability for wrongful termination claims. While the long-term import of the decision is unknown, the Walia decision continues the tradition: California courts are not as willing as the Ninth Circuit to interpret § 16600 narrowly.