Many employers try to protect their business by requiring their employees to agree not to compete for a specified time if they leave the company. However, employee noncompetition agreements are now invalid in California. Last week the California Supreme Court in the case of Edwards vs. Arthur Anderson, LLP, reaffirmed and strengthened the law. Employers may not hire on the condition that employees sign a noncompetition agreement with limited restrictions (i.e., no contact or solicitation of the company’s clients for a short time). The Court held that with only a couple of exceptions, noncompetition agreements are illegal in California. If an employer terminates employment because an employee refuses to sign a noncompetition agreement, the employer may be liable to the employee for wrongful termination damages.
How The Law Changed – The California statute prohibiting employee noncompetition agreements is very short. Section 16600 of the CALIFORNIA BUSINESS AND PROFESSIONS CODE reads: “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.” For some time employers have interpreted “restrained” in the law to mean “prohibited.” They have considered restricting employees for a limited period of time after leaving the company to comply with the law. However, on August 7, 2008 the California Supreme Court rejected the limited restriction theory and held that limited restrictions restrain competition and are illegal, closing the door tightly on employee noncompetition agreements in California.
When Noncompetition Agreements May Be Used – Noncompetition agreements are still enforceable in partnerships and when a business ownership interest is being sold. Also, companies can prevent the use of their authentic trade secrets. What the California law prohibits is restraining competition.
The California Supreme Court Case – On August 7, 2008, the Supreme Court decided Edwards vs. Arthur Anderson. Raymond Edwards, a certified public accountant, was hired by Arthur Anderson, LLP to be a tax manager for its Los Angeles office. The offer was contingent on Mr. Edwards signing a noncompetition agreement that prohibited him from working for or soliciting certain Andersen clients for limited periods following his termination. When Arthur Anderson was dismantled after its Enron related indictment, it sold the tax group managed by Mr. Edwards and used the release from its noncompetition agreement as leverage to obtain employee releases when they were hired by the buyer of the tax group. Mr. Edwards would not sign the release and was not hired by the buyer. Edwards sued Arthur Anderson, claiming that the noncompetition agreement he signed was invalid as a restraint on competition in violation of section 16600 of the BUSINESS AND PROFESSIONS CODE. The California Supreme Court held that except as provided by statute, noncompetition agreements in employment agreements were invalid. Open competition and employee mobility were cited as the legislative policy advanced by section 16600 of the BUSINESS AND PROFESSIONS CODE. The Court’s ruling is meant to support that policy in California.
Review Employment Contracts To Avoid Liability – If you have employees in California, your attorney should review your employment agreements and employee handbook to make sure you are in full compliance with the the law.