Employment Law Alert – CA Supreme Court Strikes Down Non-Competition Agreements
In August 2008, the California Supreme Court handed down its long-awaited decision in Edwards v. Arthur Andersen LLP. The Court departed from prior decisions in the federal courts by determining that a provision in an employment agreement that even “partially” or “narrowly” restricts an employee from serving customers or competing with a former employer was invalid and prohibited by California law. The Court also stated that an agreement which requires an employee to waive “any and all rights,” but which does not expressly carve out an employee’s indemnity rights, is acceptable because the indemnity rights are nonwaivable statutory claims. Click here for Court decision.
Edwards was a tax manager at Arthur Andersen. Upon accepting employment with Andersen, Edwards signed a non-competition agreement, which prohibited him from working for or soliciting certain Andersen clients for limited periods following his termination. In March 2002, the United States government indicted Andersen in connection with its investigation into Enron Corporation. In April 2002, Andersen began selling off its practice groups to various entities, who would hire on many of Andersen’s employees.
HSBC USA, Inc. offered Edwards employment. Before hiring any of Andersen’s employees, HSBC required the employees to execute a “Termination of Non-Compete Agreement.” This agreement required employees to, among other things, voluntarily resign from Andersen, and release Andersen from “any and all” claims. In exchange, Andersen would accept Edwards’ resignation, agree to his employment with HSBC, and release Edwards from the non-competition agreement. Edwards refused to sign the HSBC Termination of Non-Compete Agreement. In response, Andersen terminated Edwards’ employment and withheld severance benefits, and HSBC withdrew its offer of employment.
Edwards sued Andersen, HSBC and others for intentional interference with prospective economic advantage and anticompetitive business practices in violation of the California Business & Professions Code. Specifically, Edwards claimed that the Andersen non-competition agreement violated B&P Code §16000, which voids any contract that restrains a person from engaging in a lawful profession, trade or business. Further, Edwards alleged that HSBC’s Termination of Non-Compete Agreement was invalid because it contained a clause requiring him to waive “any and all” claims against Andersen, and that clause constituted a waiver of Edwards’ indemnity rights in violation of California Labor Code sections 2802 and 2804.
The Andersen Non-Competition Agreement Was Invalid
Under the plain meaning of B&P Code §16000, an employer cannot restrain a former employee from engaging in his or her profession, trade or business except under certain limited circumstances. The Court rejected Andersen’s argument that only contracts that totally prohibit an employee from engaging in his or her profession are illegal, and that an employer should be permitted to place some limitation on an employee’s ability to practice his or her vocation, as long as it is reasonable – otherwise known as the “narrow restraint” exception to B&P Code §16000. In Edwards, the Court rejected the “narrow restraint” exception and stated a zero-tolerance policy on any sort of restraint on a former employee’s ability to pursue his livelihood.
The Release of Claims Was Valid
Andersen had made Edwards’ new employment with HSBC contingent on his agreement to waive “any and all” claims he had or might have against Andersen. Labor Code §2802(a) provides for an employee’s right to indemnity. Edwards asserted that the release language infringed his statutorily nonwaivable right to indemnification. The Court found that the waiver did not include indemnity rights. Andersen contended that it did not carve out indemnity rights from the release because it was aware that under Labor Code 2804, such rights are statutorily nonwaivable. Such an exception was therefore legally unnecessary. On the other hand, Edwards argued that Andersen should have narrowed the release by drafting it to waive “any and all claims except as otherwise prohibited by law.” The Court disagreed, and stated that no release of claims can waive an employee’s indemnity rights, and the courts will treat such releases as expressly incorporating the law that those rights cannot be waived. Therefore, voiding all existing releases, which waive “any and all” claims, would be inappropriate.
What Edwards v. Arthur Andersen Means for Employers
The California Supreme Court has clearly stated that non-competition agreements are invalid unless they fall under specific statutory exceptions. These include agreements to protect trade secrets, or in connection with the sale or dissolution of corporations (§16601) or limited liability corporations (§16602.5). Employers should review the language of contracts such as employment agreements, non-solicitation agreements, and non-disclosure agreements to be sure they comply with the law.
Attorneys in the Berliner Cohen Employment group will be pleased to provide further information regarding the matters discussed in this Alert:
Roberta S. Hayashi
Kara L. Arguello
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