• California Supreme Court Affirms Strong Stance against Non-Competition Agreements
  • August 28, 2008 | Author: Karen E. Wentzel
  • Law Firm: Dorsey & Whitney LLP - Palo Alto Office
  • The California Supreme Court has once again affirmed California’s strong public policy in favor of open competition and employee mobility. In a long-awaited ruling, the Court in Edwards v. Arthur Andersen LLP, S147190 (Cal. August 7, 2008) held that California Business & Professions Code 16600 unambiguously prohibits post-employment restrictions that purport to limit an employee’s ability to compete unless the agreement falls within statutorily enumerated exceptions, and it is not up to the courts to adopt additional “narrow-restraint” exceptions.

    The Facts and Procedural History

    Plaintiff Raymond Edwards II (“Edwards”) worked as an accountant for Arthur Andersen LLP (“Andersen”). As a condition of his employment, he signed a non-competition agreement that prohibited him 1) from performing certain professional services for his former Andersen clients for 18 months after his departure; 2) from soliciting any former clients of the office in which he worked for 12 months after his departure; and 3) from soliciting Andersen personnel for 18 months after his departure. In the wake of Andersen’s indictment in the Enron scandal, Edwards’ practice group was sold. However, Anderson refused to release any employees from the non-competition agreement and allow them to work for the acquiring company unless the employee signed a full release of “any and all claims” against Andersen. Edwards, worried that he could be sued as part of the Enron debacle, refused to sign the release, believing that he could be giving up his right to indemnification by Andersen if he did so. In response, Andersen terminated Edwards’ employment and withheld severance benefits, and the acquiring company withdrew its offer of employment.

    Edwards sued Andersen, arguing that it was a violation of public policy to require him to sign a release of all claims in order to be excused from a non-compete agreement that was unenforceable under Business and Professions Code 16600. He also argued that the release violated California Labor Code sections 2802 and 2804, which make an employee’s right to indemnification from his or her employer unwaivable. The trial court, following caselaw from the federal Ninth Circuit in California, decided that 1) the non-competition agreement did not violate Section 16600 because it was narrowly tailored and did not completely deprive Edwards of his right to pursue his profession, and 2) the release did not expressly waive Edwards’ right to indemnification, and therefore should not be interpreted to violate the Labor Code sections. The Court of Appeal disagreed on both counts.

    The Supreme Court’s Decision

    Citing the express language of Section 16600, the Supreme Court rejected any “rule of reasonableness” or “narrow-restraint” exception that would uphold a non-competition agreement so long as it did not completely preclude the employee from engaging in a lawful profession, trade or business. The court concluded, “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.” The only exceptions are those set forth in the statute itself that allow non-competes in the context of a sale or dissolution of a corporation, partnership, or limited liability corporation.

    The Court also held that the release of “any and all claims” should be interpreted to incorporate the law that an employee cannot waive the right to indemnification. The Court concluded that it would be inappropriate to void all existing releases that do not expressly state that non-waivable statutory protections are not encompassed in the release.

    Implications for Employers

    The Court’s ruling affirms a strict interpretation of Section 16600. Any agreements that purport to limit an employee’s ability to work for a competitor or solicit former clients or customers outside the context of a sale or dissolution of a business will not be enforced in California.

    However, it is important to note that the Court expressly declined to address the so-called “trade secret exception” to Section 16600, which allows an employer to prohibit an employee from using trade secrets to solicit former customers. To the extent an agreement prohibits a former employee from using trade secrets to compete unfairly, it will still be enforceable. As a result, it becomes even more important for employers to take precautionary steps to ensure that their confidential business information will be protected as trade secrets.

    The Court also declined to decide whether the provision in the agreement prohibiting Edwards from recruiting employees violated Section 16600. Existing caselaw in California has upheld such clauses so long as they are limited to “non-solicitation” and do not purport to be “no-hire” clauses. For the time being, this continues to be the law.

    Finally, the good news – existing releases that do not expressly carve out indemnity protections are not void. However, existing releases in severance agreements should be reviewed by counsel to be sure they comply with other provisions of California employment law.