RIGHT OF FORMER EMPLOYEE TO COMPETE WITH EMPLOYER IS UPHELD

In a much-anticipated ruling in Edwards v. Arthur Andersen, No. S141790 (Aug. 7, 2008), the California Supreme Court held that non-compete agreements are invalid under California Business and Professions Code section 16600 ("Section 16600"), unless they fall within a narrow statutory exception. In so ruling, the Supreme Court rejected a line of Ninth Circuit Court of Appeals decisions that had upheld some agreements under a "narrow restraint" exemption.

Background:

In Edwards, the plaintiff signed a non-compete agreement with Arthur Andersen when he was hired. He agreed not to work for, or solicit, some of Arthur Andersen's clients for certain periods after his employment ended. When the unit that employed Edwards was sold to HSBC, HSBC and Arthur Andersen asked Edwards to sign a Termination of Non-Compete Agreement ("TONC") as a condition of employment with HSBC. The TONC required Edwards to release Arthur Andersen from "any and all claims," in exchange for Arthur Andersen "releasing" him from the non-compete agreement. Edwards refused to sign the TONC because he believed it waived his right to indemnification under the California Labor Code. When Arthur Andersen fired Edwards and HSBC withdrew its offer of employment, Edwards brought suit, alleging that Arthur Andersen violated public policy by forcing him to sign the TONC (thereby releasing Arthur Andersen) in exchange for being "released" from an illegal agreement.

The Court's Decision:

Arthur Andersen argued that Section 16600 only prohibits non-compete agreements that effectively prevent an employee from engaging in his or her profession, but allows for agreements that operate as only a partial restriction. The Supreme Court disagreed, holding instead that Section 16600 clearly prohibits all non-compete agreements, unless the agreement is covered by a statutory exception to section 16600. The Court stated, "The agreement restricted Edwards from performing work for Andersen's Los Angeles clients and therefore restricted his ability to practice his accounting profession." The agreement was therefore invalid because it restrained Edward's ability to work as an accountant.

What This Means For Employers:

The Edwards decision finally puts to rest the notion that California employers can require employees to sign "narrow" non-compete agreements. Edwards once and for all declares that non-compete agreements are illegal in California except for those agreements that fall within one of the narrow statutory exceptions. If an employee signs a non-compete agreement, it will not be enforceable. In addition, an employer's termination of an employee who refuses to sign an unenforceable non-compete agreement is a wrongful termination in violation of public policy.