Non-Competes and Section 16600

In a unanimous vote, the State Supreme Court said today that an employer cannot limit an employee from going to work for a competitor or from contacting clients of the former company.

In the case of Edwards v. Arthur Anderson, Raymond Edwards III was a tax consultant in the Los Angeles group of Arthur Anderen.

From Morrison & Foerster in 2006:

Edwards signed an employment agreement when he began working for Arthur Andersen that included a term prohibiting him from soliciting Arthur Andersen’s clients for twelve months after his employment with the company ended. Additionally, the agreement prevented Edwards from servicing any clients that he had worked with while employed by Arthur Andersen for a period of eighteen months after his employment was terminated or his resignation. [fn7]After the Enron accounting scandal, Arthur Andersen sold its Los Angeles tax practice to HSBC. As part of the sale, HSBC offered Edwards a job, but conditioned its offer on Arthur Andersen releasing Edwards from his noncompetition agreement. In turn, as a condition for releasing Edwards from the noncompetition agreement, Arthur Andersen demanded that Edwards execute a Termination of Non-Compete Agreement. The Termination of Non-Compete Agreement required Edwards to, among other things, continue to preserve confidential information and trade secrets, and to release all claims that he might have against Arthur Andersen relating to his employment. When Edwards refused to sign the Termination of Non-Compete Agreement, Arthur Andersen refused to release Edwards from his prior commitments and HSBC withdrew Edwards’s offer of employment.

At issue was Section 16601 – the narrow exceptions allowed under the California Business & Professions Code Section. Essentially, it was up to Arthur Andersen to prove that the TONC (Termination of Non-Compete) fell within those specific guidelines.

Again, from Morrison Foerster in 2006:

The California Court of Appeal for the Second District did not agree with the trial court’s ruling in the underlying case. The Court of Appeal concluded that courts have enforced noncompetition agreements only in limited circumstances. Those circumstances involved: (1) noncompetition agreements necessary to protect trade secrets or prevent unfair competition; and (2) noncompetition agreements authorized by California Business & Professions Code Section 16601 (“Section 16601”), which permits certain agreements restraining competition in connection with the sale of a business, dissolution of a partnership, or the sale or disposition of all of a stockholder’s stock in a corporation. The Court of Appeal found that none of the statutory exceptions applied to the noncompetition agreement Edwards signed, and held that the agreement was invalid unless, on remand, Arthur Andersen could prove the agreement was necessary to protect its trade secrets.

Today’s decision determined that the TONC did not fall under the aforementioned constraints.

From the ruling:

We hold that the noncompetition agreement here is invalid under section 16600, and we reject the narrow-restraint exception urged by Andersen. Noncompetition 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.

In other words, “An employer cannot by contract restrain a former employee from engaging in his or her profession, trade or business,” said Justice Ming Chin in today’s ruling. He said the law recognizes only a few limited exceptions, for non-compete agreements that are part of the breakup of a corporation or partnership.” (from SFGate).

How’s that for some crazy news?