California Supreme Court Invalidates Noncompetition Agreements
The Supreme Court of California dealt a significant blow to noncompete agreements with its recent decision in Edwards v. Arthur Andersen LLP, 189 P.3d 285 (Cal. 2008).
Raymond Edwards went to work for Andersen as a tax manager in 1997. When he was hired, he had to sign a noncompete agreement. In May 2002, when Andersen imploded as a result of its work for Enron, Andersen decided to sell its tax practice, including Edwards’ group, to HSBC USA, Inc.
In July, HSBC offered to hire Edwards, but first required that he sign a termination of noncompete agreement (TONC), which, among other things, required Edwards to resign from Andersen and release Andersen from any and all claims.
HSBC would not hire Edwards without a signed TONC and Andersen required a signed TONC before it would release him from the noncompete agreement. Edwards signed HSBC’s offer letter, but not the TONC. Andersen terminated him and withheld any severance, and HSBC withdrew its employment offer.
Edwards sued Andersen, HSBC, and the HSBC subsidiary created to purchase the tax practice group, and alleged intentional interference with prospective economic advantages and anticompetitive business practices under the Cartwright Act (California's general antitrust law).
He settled with everyone except Andersen, and the trial court ultimately ruled in Andersen’s favor as to all of Edwards’ claims. The Court of Appeal determined that Andersen's noncompete agreement was invalid under California law and that requiring him to sign the TONC as consideration for being released from the noncompete agreement was an independently wrongful act for purposes of Edwards' claim for intentional interference with prospective economic advantage. The court also held that the TONC purported to waive Edwards' right to indemnification under California labor law and therefore violated public policy.
In the majority opinion written by Justice Ming W. Chin, the Supreme Court looked first at Section 16600 of the California Business and Professions Code, which provides that "[e]xcept 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." Andersen urged that "restrained" should be read to mean "prohibited," so that only a contract that completely prohibited an employee from working at a particular trade or profession would be void. Under that interpretation, Edwards' noncompete agreement, which did not impose a complete prohibition on his employment, would be valid.
The court rejected Andersen's interpretation, however, and found that, "[t]he noncompetition agreement that Edwards was required to sign before commencing employment with Andersen was therefore invalid because it restrained his ability to practice his profession."
The court likewise disagreed with Andersen's position that, as determined by the district court, a "narrow-restraint" exception to Section 16600 existed. The exception stemmed from some Ninth Circuit decisions that held that Section 16600 did not apply "'where one is barred from pursuing only a small or limited part of the business, trade or profession.'" The Supreme Court found that no California case had adopted the Ninth Circuit's reasoning, however, and declined to apply any narrow-restraint exception.
The final issue addressed was Edwards' challenge to the agreement that purported to release Andersen from any and all claims arising out of his employment. The Court of Appeal had determined that the provision violated California Labor Code Section 2802, which required an employer to indemnify an employee from losses or expenditures incurred as a result of employment.
But the Supreme Court reversed the Court of Appeal's ruling because Section 2802 meant that Edwards' right to indemnification could not be waived and was not affected by the agreement: "Therefore, the waiver of 'any and all' claims would not encompass the right to indemnification because we treat the TONC as expressly incorporating the law [Section 2802] that the employee cannot waive that right."
Edwards has been the topic of a lot of discussion, as lawyers representing California employees and employers try to understand the scope of its holding. The California Workforce Resource Blog provided this discussion, and The Complex Litigator in this post questioned whether WageLaw's interpretation of the decision was correct. The California Labor & Employment Law Blog cautions employers to make sure their noncompete agreements do not violate Section 16600, which will be interpreted strictly.
