Aetna Discards ‘Non-Compete’ Tactic for Retaining Workers

Discarding a tactic that employers are increasingly using to retain scarce workers, Aetna U.S. Healthcare will no longer force its California employees to sign agreements not to work for competitors after they leave the company.

The decision by the Hartford, Conn.-based company, the nation’s largest health insurer, follows lawsuits by several former employees who challenged the legality of the contracts.

But some experts say they don’t expect other employers to immediately follow Aetna’s move.

Even though having workers sign so-called non-compete contracts is illegal in California, some employers use the threat of enforcing them to dissuade their employees from leaving.

Non-compete contracts, experts say, have become more popular among employers as workers increasingly jump from one job to another, taking their training and knowledge with them. Companies such as Aetna--which are facing the tightest job market in a generation--say they need non-compete agreements to secure their client lists and trade secrets, and to protect their staffs against raids from competitors.

But Aetna executives recently discovered that requiring workers to sign such contracts, and that firing them for refusing to do so, are not only illegal but also costly.

Last year, Aetna paid a confidential sum to settle a suit brought by a San Diego woman who was fired for refusing to sign a non-compete contract as a condition of her continued employment. Another former employee who was fired for the same reason was awarded nearly $1.2 million in December by a San Francisco jury.

And earlier this week, U.S. District Judge Nora M. Manella ruled that Aetna is liable for more damages for having terminated a Riverside County woman who refused to sign a similar document. The damage amount will be determined at a trial later this year.

Those cases arose from the 1997 firing of about 100 Aetna employees who refused to sign non-compete agreements to not work for a rival for at least six months after leaving the insurer. Other similar suits are pending in Los Angeles and Orange counties, attorneys say.

Bobby Pena, a spokesman in the insurer’s San Francisco office, said the company decided to abolish its non-compete contracts because “we believe there is confusion as to what the law is” in California.

“We continue to believe we did nothing to violate California’s public policy” against non-compete agreements, Pena said. He said the company has won other suits brought by former employees who were fired for refusing to sign the same contracts.

In a declaration filed Feb. 1 in the San Francisco case, Aetna’s president, Michael J. Cardillo, assured Superior Court Judge Stuart R. Pollak that he does not plan to revive the non-compete contracts for his 4,000 California employees.

The company’s employees in the 49 other states will still be bound by non-compete contracts, Pena said.

Pollak has yet to determine whether Aetna’s action also violated California’s laws against unfair business practices. If he rules against Aetna, Pollak could award as much as $1 million in fees to San Francisco attorney Alan Exelrod, who represented the plaintiff in the case.

In a written decision, Pollak noted that since 1872, state law voids “every contract by which anyone is restrained from engaging in a lawful profession, trade or business.”

The law, Pollak said, would be “seriously undermined if employers were allowed, with impunity, to insist upon broad, illegal non-compete” contracts. Many employees undoubtedly would honor “the unlawful restraint,” fearing suits by their former employers. Prospective new employers might also withhold job offers because they too might not want to be the target of lawsuits from the old employer, the judge said.

The defeats recently suffered by Aetna in the courtroom are instructive for many employers, according to legal experts who say they don’t expect some employers to heed the lesson.

Cliff Palefsky, a San Francisco attorney, said he and other lawyers who represent employees in labor disputes find it troubling that so many employers are requiring their employees to sign non-compete agreements.

“It’s a new form of indentured servitude where someone who no longer is your employer can prevent you from earning a living in your particular field,” Palefsky said.

Gary Weiss, an employment law expert and partner in the Silicon Valley office of Orrick Herrington & Sutcliffe, said he tells his high-tech clients who inquire about non-compete contracts that they’re a “no-go” in California.