California's long-standing prohibition of non-compete agreements was recently reaffirmed by the Supreme Court in Edwards v. Arthur Anderson LLP, Case No. S147190. The decision was a much-anticipated ruling on the Ninth Circuit's limited or "narrow-restraint" exception, which "only makes illegal those restraints which preclude one from engaging in a lawful profession, trade, or business." Campbell v. Trustees of Leland Stanford Jr. Univ., 817 F.2d 499, 502 (9th Cir.) In other words, the non-compete would have to completely restrain the party from pursuing his trade or business to be invalid.
Until now, the California Supreme Court had not considered the narrow-restraint exception. The Court rejected it, finding that the statute prohibiting non-compete agreements "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." Further, the Legislature carved out exceptions to the non-compete prohibition, but failed to create a "reasonable restraint" exception. See e.g., Bus. & Prof. Code §§ 16601 (noncompetition agreements in the sale or dissolution of corporations are permitted), 16602 (partnerships), 16602.5 (limited liability corporations). As such, no exception was intended.
At issue in Edwards was a non-compete clause that restricted the former Anderson employee, for an 18-month period, from performing professional services of the type he had provided while at Anderson or for any client on whose account he had worked. The employee was also prohibited from providing professional services to any client of Anderson's Los Angeles office for one year after his termination. After giving considerable review to the history and purpose behind the statute restricting covenants not to compete, Business and Professions Code section 16600, and determining that it would not be adopting the Ninth Circuit's narrow-restraint exception, the California Supreme Court found that Anderson's non-compete agreement was invalid.
The Court also considered whether a waiver of "any and all claims, including "claims that in any way arise from or out of, are based upon or relate to [the employee's] employment" with Anderson included waiver of indemnity rights. An employee's indemnity rights are provided by the Labor Code and any agreement to waive these rights is void as against public policy. See Labor Code §§ 2802, 2804. The employee refused to sign the agreement because it did not state that his indemnification rights were protected. The Court sided with Anderson on this issue, holding that the release of "any and all claims" did not include nonwaivable statutory provisions, such as those guarantees by the Labor Code. Even though the agreement did not expressly exempt indemnification rights, those rights were guaranteed and did not need to be enumerated in the agreement. In addition, the Court found it unnecessary to require employers to add that the release of "any and all" claims excluded those "as otherwise prohibited by the law." As a practical matter, such language would be meaningless because nonwaivable claims, as a matter of law, are automatically excluded form the agreement.
What does Edward mean for California employers? The California Supreme Court made it very clear that the prohibition on covenants not to compete is alive and well. Employers cannot make "reasonable" non-compete covenants and expect it to pass muster. Such an attempt is clearly contradictory to public policy and, not only is void, but could also subject an employer to liability for violations of the Business and Professions code or an intentional interference with prospective economic advantage claim. If you have any questions about whether an agreement contains a questionable provision, it is highly recommended to have a California licensed attorney review it.
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