California Non-Compete Agreements

California Non-Compete Agreements: It’s No Contest after Edwards

Long-term employment when companies quickly become aware the past for most American workers, especially in the technology forward California economy. Employers have benefited from these changes, by receiving the benefit of rapid flexibility in their employee base and hence cost structure. Employees have arguably benefited in some ways as well, by taking advantage of easy mobility within the workforce. Some employers have also gone one step further, by seeking to you protect themselves by adding “non-competition clauses” to their employee’s contracts.

Generally speaking, a non-competition clause is any form of language in an employment contract that seeks to limit the employee’s ability to “compete” against his/her former employer once he is no longer employed by that employer.

California Business and Professions Code Section 16600 clearly forbids non-competition contracts and non-competition clauses, providing “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” In spite of the plain language of Section 16600, companies have continued to require that their employees sign non-competition agreements, asserting that these agreements somehow comply with Section 16600.

In Edwards v. Arthur Andersen LLC 2008 DJDAR 12286, the California Supreme Court unambiguously held that non-competition agreements are void in California. In summary, this case arose out of the collapse of Arthur Andersen. Edwards had been an employee of Arthur Andersen, which was subsequently purchased by HSBC.

Before hiring any of Andersen’s employees, HSBC required them to execute a “Termination of Non-compete Agreement” (TONC) in order to obtain employment with HSBC. Among other things, the TONC required employees to, inter alia, (1) voluntarily resign from Andersen; (2) release Andersen from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from” defendant; (3) continue indefinitely to preserve confidential information and trade secrets except as otherwise required by a court or governmental agency; (4) refrain from disparaging Andersen or its related entities or partners; and (5) cooperate with Andersen in connection with any investigation of, or litigation against, Andersen. Edwards signed the HSBC offer letter, but he did not sign the TONC. In response, Andersen terminated Edwards’s employment and withheld severance benefits. HSBC withdrew its offer of employment to Edwards. Litigation ensued.

At trial, the court “specifically decided that (1) the non-competition agreement did not violate section 16600 because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession;…..” Edwards appealed. The Court of Appeal held that the non-competition agreement was invalid under section 16600. The decision was appealed and the California Supreme Court granted review.

In reaching its decision, a unanimous Court wrote: “We hold that the non-competition agreement here is invalid under section 16600, and we reject the narrow-restraint exception urged by Andersen. Non-competition agreements are invalid under section 16600 in California even if
narrowly drawn, unless they fall within the applicable statutory exceptions of
sections 16601, 16602, or 16602.5.” [J. Kennard and Werdeger concurred with respect to the non-competition issue, and dissented on a separate issue].

Clarity provided by this decision is significant especially in the California economy particularly Northern California, where high-tech job hopping is more common than not. This decision is also supported by some recent studies that concluded the constant shifting of resources and personal intellectual capital from one company to another was a major contributor to innovation and growth. See generally, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128 and Covenants Not to Compete, 74 N.Y.U.L Rev. 575 (1999).

The lesson is that if a California employer asks you to sign a non-competition agreement it should be viewed as a cautionary sign. If you have already signed a non-competition agreement within California, you should feel comfortable that such an agreement is void, absent the agreement falling “within the applicable statutory exceptions of sections 16601, 16602, or 16602.5.”