Another Non-Compete Thrown Out

In VL Systems v. Unisen, a Californian Court of Appeals has thrown out another type of non-compete agreement.  The general rule in California has been that an employer could not forbid an employee from working for other companies, including competitors, as long as no trade secrets were in jeopardy.  However, savvy employers have long used a loophole to get around this rule, especially in the "consulting" business. In this arrangement, an ultimate client would hire a consulting company to provide temporary labor.  The consulting company would then hire an employee and pay her a fraction of what they were getting paid by ultimate client.  The employee would work at the ultimate client site, frequently along side other employees of ultimate client.  While the consulting company might try to put a "non-compete" agreement in the contract with the employee, many employees know that these non-compete agreements are illegal.  Instead, the consulting company would put it in the contract with the ultimate client.  That is, if ultimate client hired one of consulting companies employees, they would then have to pay a significant amount of money.  Thus, not a "non-compete" because it doesn't actually prevent the employee from working wherever she wants -- or so the argument went. 

The facts of this case are a little different from the general scenario outlined above, so the holding may be a little more limited than most employees of consulting companies would hope for.  In this case, the employee (David Rohnow) worked for the consulting company, but worked on projects other that Star Trac's (ultimate client). Star Trac used the consulting company to provider workers, but never used David directly.  They did have a clause in their contract that required a significant penalty is they hired any of consulting company's employees.  Star Trac posted a job listing on the internet, David applied and was hired.  The consulting company then sued for the $60,000 penalty that they felt they were due.

The court threw out the clause in the contract that required a penalty to be paid in the event that ultimate client hired any of consulting company's employees.  It held that such a clause was simply a non-compete clause dressed up differently.  That is, it does not matter how a non-compete clause is structured. The courts will look at the end result, and if it looks like a non-compete, it will be treated as a non-compete.

Employees should be cautioned that the court did make note that it was important that (1) Employee never worked directly for ultimate client while at consulting company, (2) that Employee was only with consulting company for a short period of time, and (3) that no time or money was spent on training Employee for these particular jobs.  Thus, it is likely that non-hire clauses that are designed to prevent any of the above three issues from occurring may still be enforceable.

As a side note, it appeared that consulting company was paying employee on a salary basis in violation of California overtime laws, but that was not the subject of this lawsuit. 

Comments

[Paul Anderson]

This is good blog site.

[Billie Johnson]

Please we need your help, our company claims that they have a non compete contract signed by us and they have closed our doors and our office, leaving us without a job the day before thanks giving, we have ask for a copy of said contract ,they claim that they have sent it to a lawyer and that we will need a lawyer to obtain it, we do not believe we ever signed such a paper and if we did it was certainly never explained to any of us, we are nurses and have patients in a retirement center who need us and we have such a wonderful relationship with these elderly people, and even though another nursing registry will be coming in and taking over our office the company that we work for says we cannot work for that other company , leaving us without a job period. We are devastated, and have no money for a lawyer, Nurses to go is the company who is being so uncaring and unprofessional and rotten to us. Please help us?

Joyce Johnson and
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[Kathy Winget]

My Husband and I sold our hearing aid offices (Bloomingdale and Lisle, Il.) April 27th 2006 with a 3 year no compete. My husband quit 9 months later and opened an office in Highland, In.
1and 1/2 years later (June 1st, 2008) we sold our Indiana office to them also and continued to work for them. After the first acquisition, we both worked for them and even though my husband quit them, I continued to work for them for 4 months more (Feb.2007 thru June 2007) until they fired me due to low sales numbers. I drew unemployment.
After we sold our Indiana office my Husband worked for them for 20% commission and I thought that I was part of the agreement. My Husband didn't feel that they lived up to their end of the bargain by not letting him do his own marketing so he could make more commission. My Husband has 16 years experience in the business and a BSBA Degree in Marketing and they hired a Vice-President from Sara Lee that knows zero about how to market hearing aids. When my Husband quit March 25, 2009, they asked me to stay on to continue to service new clients on trial deals, but they have never compensated me for my time or services from June 1, 2008 through May 5, 2009. They said that I was part of my Husband's deal, but they have no written contract pertaining to any such agreement. They are not about to let my husband go against their no-compete because he is a very good salesman, but the general manager and vice-president have made it clear verbally that I am free to work anywhere in the industry because they have insinuated that I am no threat.
My Husband wants to open a hearing aid business in my 19 year old's name and put my license in there to dispense hearing aids. Do you foresee any legal issues coming forth quickly? This is a very powerful Mormon group with the bank of Utah behind them and have aquired over 50 more offices nationwide. Do we have any chance at all?

Kathy Winget (630)4396491 [email protected]

[Jessica]

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