The state of California is considered an at-will employment state, where both the employee and the employer may freely walk away from the employment contract at any time with little to no consequences. This freedom, while intended to benefit both the employer and the employee, has enabled several employers to hire away their competitor’s employees. Last month the Ninth Circuit identified significant nuances concerning the issue of whether, under California law, a corporation’s allegations that its competitor lured away employees who signed term-based employment contracts, sufficiently plead intentional interference with contract, interference with prospective economic advantage and violation of the California Business and Professions Code section 17200 et seq., also known as the Unfair Competition Law (“UCL”).
On March 15, 2007, the Court of Appeals for the Ninth Circuit issued a decision interpreting these two common law tort claims and the URL in CRST Van Expedited, Inc. v. Werner Enterprises, Inc., 2007 No. 04-56809 and No. 04-57129 (9th Cir. March 15, 2007). The appellate court reversed the district court’s decision to dismiss Plaintiff CRST’s claims and instead ruled that California law forbids hiring an employee whom the competing employer knows to be under contract with his or her present employer, even if the contract does not assure the employee of continued employment for a specified period of time.
The case involved a trucking company, CRST, which paid for its employees to receiving training in order to become truck drivers. Specifically, CRST would pay for the first two phases of training with a prospective employee and then would enter into an employment contract, at which time CRST would pay for the third phase of training. CRST’s employment contracts provided, in pertinent part that “the term of CRST’s employment of Employee under this contract shall be for a period of one (1) year…subject to termination for Due Cause by CRST prior to the end of the term…” (Id. at 3188). After the one year period, the employment became at will and could be terminated at any time by either party. (Ibid.) If an employee left CRST within the first year, they would be required to reimburse CRST $3,600 in training expenses. Conversely, if CRST terminated an employee within the first year without cause, CRST would release the employee from their obligation to reimburse CRST for the training expenses. The defendant, Werner, allegedly solicited and hired two of CRST’s employees (both of whom had completed their first month of their first year of employment), even though CRST had notified Werner several times of the terms of its employment contracts.
CRST sued Werner in federal court for intentional interference with contract, violation of the UCL, interference with prospective economic advantage and misappropriation of trade secrets (which was dismissed). Werner claimed that under California law, it was free to hire the drivers so long as Werner did not use “independently wrongful means” in doing so. The Ninth Circuit rejected Werner’s defense and held that CRST’s employment contract alleged did not create an at-will employment relationship during the first year of employment, the period when it was allegedly the subject of Werner’s interference and consequential breach. Further, since the terms of the employment contract concerning the first year of employment limited both CRST’s and the employee’s “freedom to walk away from the employment”, the Ninth Circuit found that CRST’s employment contract provided for employment of a specified term and as such, the employment relationship was not at-will during the first year of employment. (Id. at 3194, 3196).
Interestingly, in upholding CRST’s claims of interference with prospective economic advantage, the Court agreed that Werner’s act of interviewing and offering a job offer was sufficient to constitute a business act or practice, and since CRST’s employment agreements with these drivers were term contracts, Werner committed the “wrongful act” required to satisfy the interference with economic advantage claim. The Court recognized that in earlier California cases, in order to successfully plead interference with contract, the plaintiff who lost an at-will employee, had to allege and prove that its competitor not only interviewed an applicant and made a job offer, but initiated targeted solicitations to disrupt the competitor’s business, for example. The appellate court emphasized that while its holding may appear contrary to the distinction between the two common law torts of intentional interference with existing contract and intentional interference with prospective economic relations by earlier California cases, the Ninth Circuit noted that CRST adequately alleged specific allegations of contract interference coexisting with independent interference with prospective economic relations.
This ruling has repercussions for employers on both sides of competitive hiring: the hiring company and the previous employer. New employers who hire a competitor’s employees should take extra precautions when actively recruiting employees to ensure that the prospective employee is not contractually banned from accepting the employment offer. For employers who want to prevent an employee from leaving to join a competitor, they should enter into a contract that provides for some financial consequences if the employee is terminated or severs their employment within a set period of time.
Andrea Anapolsky is an associate in Weintraub Genshlea Chediak Tobin & Tobin’s Business, Securities and Commercial Transactions section. She represents both public and private companies.