Companies Are Not Liable for Interfering with At-Will Contracts

AdobeStock_314925095-300x200The Supreme Court of California recently issued an opinion with significant consequences for any business that enters into contracts. This opinion addresses liability for interfering with an at-will contract, as well as the limits of the few exceptions to the statutory ban on non-compete agreements in our state. It is essential for business owners to understand the implications of this ruling in order to enter into enforceable contracts that will not leave them liable for damages, court costs, and other costly expenses.

The Latest Supreme Court Ruling

On August 3, 2020, the Supreme Court of California issued an opinion that answered critical questions about how California law on tortious interference with business relations applies to an at-will contract. The Court ruled that companies are not liable for encouraging others to end an at-will contract unless there is “independent wrongfulness.” This analysis relied heavily on the uncertain nature of an at-will contract. While parties to a binding contract are negotiating for certainty in their future business relationship, there is no such certainty in an at-will contract. For this reason, legitimate business competition takes precedence over the terminable relationship in such a contract.

What Businesses Cannot Do

Of course, the Court’s opinion does not mean that businesses have free reign to destroy at-will contracts by any means available. The Court clearly prohibited such interference when there is “an independently wrongful act.” To determine whether this requirement is met, a court must evaluate whether the act was wrong regardless of the contractual interference. For example, if a company used illegal means (such as fraud or perjury) to convince a party to end an at-will contract, this act would be wrong in and of itself.

It is also important to understand how the law regarding at-will contracts applies to non-compete agreements. Section 16600 of the Business and Professions Code bans such agreements. There are a few exceptions, but these are very limited in both scope and duration. The recent Supreme Court opinion held that these prohibitions could be applied to businesses, as well. That means that a business agreement (whether it is at-will or not) cannot ban the parties from engaging in competing business after their agreement is terminated. If one of the limited exceptions applies, the non-compete clause is subject to a reasonableness test by a court. These exceptions mean that a party could challenge such a provision based upon an unreasonable time limit, geographic area, the scope of business activities, or any other restriction that was unreasonable.

Experienced Silicon Valley Business Lawyer for All Legal Issues Regarding Business Competition

As illustrated above, there are many ways in which a business owner can be exposed to contractual liability. It is crucial to protect yourself, your business partners, your employees, and your assets by consulting with an experienced Silicon Valley contract lawyer before entering into any business agreement. Call (408) 441-7500 or contact us through our website to schedule a consultation.