E-Alerts
The California Supreme Court Rejects Even Narrowly Tailored Noncompetition Agreements
On August 7, 2008, the California Supreme Court (the “Court”) issued a decision clarifying that even narrowly tailored non-competition agreements violate Section 16600 of California’s Business and Professions Code (“Section 16600”). This maintains California’s standing as the most restrictive state in the nation with respect to non-competition agreements.
Section 16600 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The only exceptions, clarified the Court, are non-competition agreements used in connection with the sale or dissolution of a business. Such agreements typically protect the buyer of a business against competition by the seller. Garden-variety non-competition agreements between employers and their employees do not fall within these exceptions.
The case before the Court, Edwards v. Arthur Andersen LLP, involved a non-competition agreement that Arthur Andersen LLP (“Anderson”) required the plaintiff, Raymond Edwards II (“Edwards”), to sign when he commenced employment with Andersen as a tax manager. The non-competition agreement prevented Edwards from providing professional services to (a) any Andersen client with whom he had worked directly (to be in effect for eighteen months after termination of employment), and (b) any client of the Andersen office to which he had been assigned (to be in effect for twelve months after termination of employment). The California Court of Appeal had determined that this instrument was invalid, and Andersen sought the Court’s review.
Andersen argued that the non-competition agreement was valid under the so-called “narrow-restraint” exception to Section 16600. This exception originated in the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) but was never endorsed by the Court, whose interpretation of California law is conclusive. Under the narrow-restraint exception, argued Andersen, a non-competition agreement is permissible if it prevents the employee from pursuing only a small or limited part of the business, trade, or profession. According to Andersen, Edwards’s non-competition agreement prevented him from serving only existing firm clients, not from otherwise working in his profession, and therefore fell within this exception.
The Court ruled that Section 16600 does not embody the narrow-restraint exception and declined to adopt it. In the Court’s view, Section 16600 is unambiguous and reflects a settled legislative policy in favor of open competition and employee mobility. In this regard, the Court stated that only the Legislature can decide to relax Section 16600’s restrictions or to adopt additional exceptions.
The Court expressly declined to address whether Section 16600 permits non-solicitation-of-client agreements where the employer’s client list itself is a trade secret, which is the view of at least one of California’s Courts of Appeal. The Court also left for another day the question of whether (or the extent to which) non-solicitation-of-employee agreements are valid under Section 16600.
As a result of this ruling, employers that had crafted non-competition agreements to conform with the Ninth Circuit’s narrow-restraint exception will no longer be able to enforce the agreements in federal courts within the Ninth Circuit’s jurisdiction.
Employers should proceed cautiously as to all of these unresolved issues. In this respect, the Court noted that “an employer’s termination of an employee who refuses to sign an invalid non-competition agreement constitutes a wrongful termination in violation of public policy.” The Court also ruled that attempting to enforce an invalid non-competition agreement might support a claim against the employer for intentional interference with prospective economic advantage.
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Please feel free to contact us if you have questions about the California case, non-competition agreements in general, or any restrictive-covenant agreement that you may have been utilizing in California. We routinely help employers draft non-competition agreements that comply with the various state laws governing their business operations and would be happy to be of service.
