United States: No Means No – Supreme Court Confirms Non-Competes Invalid In California

Originally Published 6^th May 2009

The California Supreme Court recently put the final nail in the coffin of employee non-competition agreements. In Edwards v. Arthur Andersen LLP, the Court confirmed that California public policy prohibits such agreements, and rejected a "narrow restraint" exception adopted by California federal courts. After Edwards, it is clear that California employers take substantial and unnecessary risk requesting or obtaining employee signatures on non-competition provisions.

The Edwards Case

CPA Raymond Edwards joined Arthur Andersen's Los Angeles office in 1997. When he was hired, he signed a non-competition agreement promising that for 12-18 months after leaving employment he (1) would not work for clients he had worked for at Andersen; (2) would not solicit work from any client of the office; and (3) would not seek to hire any Andersen employee. Andersen dissolved following the collapse of Enron, and (under somewhat convoluted circumstances) the validity of Edwards' non-compete became an issue in a lawsuit Edwards filed against his subsequent employer HSBC.

Andersen argued that the non-compete was valid, but the California Supreme Court disagreed. The Court noted that California Business and Professions Code section 16600 makes "void" any contract restraining an employee from engaging in a lawful profession, trade or business. The Court held that none of the statutory exceptions to section 16600 (generally, non-competes necessary for the protection of trade secrets and those in contracts involving the sale of a partnership interest or business) applied, and thus determined Andersen's non-compete was invalid.

The Court also rejected a "narrow-restraint" exception to section 16600's prohibition of non-competes that had developed in Ninth Circuit (federal) cases. According to the Ninth Circuit, section 16600 only applied to restraints that completely prevent an employee from practicing his or her profession, and that "narrow" restraints – preventing work for some but not all clients in a defined market, for instance – were valid. The California Supreme Court criticized the narrow restraint exception as contrary to California law, confirming that the statutory exceptions to section 16600 provided the only valid basis to enforce an employment-related non-compete in California.

Edwards dispels any doubt that a non-compete in a California employment contract, and a customer non-solicitation provision, will be considered invalid except in the relatively rare cases that implicate one of the few statutory exceptions to section 16600. (The Court did not address the employee non-solicitation provision in Edwards' contract.) However, employers may take steps necessary to protect their trade secrets, even if doing so limits an employee's right to work for a competitor after his or her departure.

Employer Action Items

Archer Norris recommends that employers avoid seeking a non-compete from any California employee, and remove such provisions from contracts and handbooks directed toward California employees. Not only will such a provision likely be unenforceable, it may be an illegal employment practice opening the employer up to increased liability exposure. Instead, employers should focus on policies and agreements designed to maintain the confidentiality of trade secrets, which receive more favorable treatment in the courts.

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