ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, August 11, 2008

California Supremes' Sweeping Ruling Invalidates Non-competes

Images Robert J. Ambrogi of Legal Blog Watch beat us to it, and did it perfectly, so here's his summary:

In a ruling sure to send shudders through corporate legal departments up and down the west coast, the California Supreme Court has ruled that virtually all non-competition agreements are invalid in that state. The Recorder has a full report on the ruling, Edwards v. Arthur Andersen, and Ars Technica has more about it.

The ruling turns on an 1872 state law, Section 16600 of the Civil Code, that says, "Except as provided in this chapter, 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 law provides exceptions for noncompete agreements in the sale or dissolution of corporations, partnerships and LLCs. "Under the statute's plain meaning, therefore," writes Justice Ming Chin, "an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule."

The decision rejects a recent finding by the 9th U.S. Circuit Court of Appeals that the statute contained a "narrow restraint" exception that allowed non-compete agreements as long as they restricted only "a small or limited part" of an employee's future ability to work, The Recorder explains.

In Edwards, accounting firm Arthur Andersen argued that the 'narrow restraint' exception condoned the company's non-competition agreement, which tax manager Raymond Edwards II signed in 1997. Five years later, banking corporation HSBC offered Edwards a job on the condition that he and Arthur Andersen terminate his non-compete contract. Edwards refused to sign the termination agreement, citing a requirement that he give up all future claims against the accounting firm, which had recently been indicted in connection with its work at troubled Enron Corp. Arthur Andersen then fired Edwards, and HSBC rescinded its job offer. Edwards sued both companies for interfering with his career.

Even though the court rejected the narrow restraint exception, lawyers were not surprised by the ruling, The Recorder says. "I think this is what most practitioners in California expected," said Jennifer Redmond, a partner with Sheppard, Mullin, Richter & Hampton.

Edwards v. Arthur Andersen (Cal. Aug. 7, 2008).

[Meredith R. Miller]

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