Except in very limited circumstances, an employer in California cannot prevent its former employees from competing with the employer. Yesterday, the California Supreme Court held that even narrow restrictions on a former employee's ability to compete (which are valid in many other states and which some federal courts in California had upheld) are not valid under California law. Edwards v. Arthur Andersen LLP, No. S147190 (Cal. August 7, 2008).
CASE DETAILS:
At issue in the case was an agreement that Arthur Anderson required managers to sign as a condition of employment. The agreement restricted the manager, after his or her employment ended, (a) from soliciting for 12 months any clients of the office in which he or she worked, and (b) from performing services for 18 months for any client for whom he or she had provided similar services during the last 18 months of employment. The Court held that these restrictions violated California Business and Professions Code section 16600, which provides that "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 Court called for a plain reading of the statute, rejecting the Ninth Circuit's "narrow restraint" exception, which Arthur Andersen argued the Court should apply. The Ninth Circuit has held that noncompetition agreements are valid if they do not preclude an employee from engaging in a lawful profession, trade or business. See, e.g. International Business Machines Corp. v. Bajorek, 191 F.3d 1033 (9th Cir. 1997) (upholding an agreement mandating that an employee forfeit stock options if he worked for a competitor within six months of leaving his employment). The Court rejected this approach, reasoning that "restrained" means just that-"restrained," and not "prohibits" or "precludes." In other words, an agreement that in any way "restricts" an employee from pursuing a job is invalid in California, even if the agreement has what appear to be reasonable limits.
SOME NONCOMPETITION AGREEMENTS STILL VALID:
There are still some narrow exceptions to the rule that noncompetition agreements are invalid in California. The Business and Professions Code allows noncompetition agreements when they relate to the sale of a business, dissolution of a partnership, or the sale of a shareholder's entire interest in a company. In addition, courts in California will enforce noncompetition agreements to the extent necessary to protect legitimate trade secrets.
COURT HOLDS THAT RELEASES THAT WAIVE "ANY AND ALL CLAIMS" MAY BE ENFORCEABLE:
In a separate holding, the Supreme Court in Edwards also held that contracts that require employees to release "any and all" claims are lawful. The plaintiff challenged a release that Arthur Andersen asked him to sign under the theory that the release, by calling for him to release Arthur Andersen from "any and all claims," was null and void under Labor Code § 2804. Labor Code § 2804 states that any agreement to waive the protections of Labor Code 2802 (which requires an employer to indemnify its employees for expenditures incurred in the discharge of his or her duties) is null and void. The Court reasoned that principles of contract interpretation called for courts to enforce contracts where possible, and that because the release did not expressly reference indemnity rights, it should not be read to encompass an attempted waiver of such rights. The Court rejected the plaintiff's argument that the contract should have included the phrase "except as otherwise prohibited by law," as such a phrase is "vague and essentially informs the employee of nothing."