California: Noncompete agreements have no place in employment contracts
By Ronda Jamgotchian, September 2006
[From the SHRM Online Workplace Law Focus Area: California]
The Second District Court of Appeal in Los Angeles issued a significant opinion at the end of August, finding that noncompete agreements in California employment contracts are impermissible. The court explicitly rejected decades of prior decisionsâ€”many of them in federal courtsâ€”that had found such agreements to be permissible if they were narrowly crafted so that an employee who left a company still could work in his or her profession. The decision makes clear that such agreements are generally invalid and employees cannot be compelled to sign them as a condition of employment (Edwards v. Arthur Andersen LLP, No. B178246 (Cal.App. 2 Dist./Div. 3) (Aug. 30, 2006)).
The case was brought by Raymond Edwards II, who was hired by Arthur Andersen (â€œAndersenâ€) in 1997. At the time of his hire, Edwards was required to sign a noncompete agreement, which prohibited him from working for, or soliciting business from, certain Andersen clients in the event of his termination. When Andersen went out of business following the 2002 Enron accounting scandal, its tax practice was sold to HSBC, which hired various Andersen personnel, including Edwards. As a condition of Edwardsâ€™ employment with HSBC, however, Andersen required that he sign a â€œTermination of Noncompete Agreement,â€ which released him from his 1997 noncompete agreement in exchange for a variety of promises that were highly favorable to Andersen. When Edwards refused, his offer from HSBC was withdrawn, and Edwards sued Andersen under a variety of legal theories, including intentional interference with prospective economic advantage and violation of the Cartwright Act.
The trial court sustained Andersenâ€™s demurrer to the Cartwright Act claim and dismissed Edwardsâ€™ intentional interference claim. In its ruling, the trial court found that both the 1997 noncompete agreement and the 2002 â€œTermination of Noncompete Agreementâ€ were valid.
The court disagreed, finding that noncompete agreements between an employer and employee are, under most circumstances, invalid in California. In so holding, the three-judge panel stated that such agreements violate Californiaâ€™s public policy in favor of protecting employee mobility. Specifically, the court held that â€œSection 16600 prohibits noncompetition agreements between employers and employees even where the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee.â€
The court went on to state that â€œnoncompetition agreements burden a terminated employee with the task of guessing, at his or her peril, whether a court might find particular restrictions sufficiently narrow or overly broad.â€
The ruling clarifies a long-standing split of authority regarding whether such agreements are lawful. In light of this decision, which allows noncompete agreements only to protect trade secrets, employers should be more cautious than ever when drafting employment contracts.
It was really only a matter of time before the Courts spoke on this issue as California employment law seems to conflict with non-competes. But then again, with what doesn’t California employment law conflict?
Just kidding, you know I love it here.