CA Court Rules Non-competition Agreement Invalid

September 1, 2006 ( - The state of California's 2nd Division Court of Appeal has determined that non-competition agreements are invalid under California labor laws in a case where a former Arthur Andersen employee was not hired by a successor company after refusing to sign a Termination of Non-Compete Agreement (TONC).

Rejecting a federal appellate court’s decision that the non-competition agreement fell within a “narrow restraint doctrine” of the California labor law, the state court said, “We believe the Ninth Circuit’s ‘narrow restraint’ gloss on section 16600 is a misapplication of California law when applied to an employee’s non-competition agreement. In our view, section 16600 prohibits non-competition agreements between employers and employees even where the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee.”

The court did note there was an exception to the labor law with regard to trade secrets. It said Arthur Anderson could argue for the trade secret exception on appeal.

After concluding the non-competition agreement was invalid, the court said the requirement of Arthur Anderson for employees to sign the TONC as a condition of release was therefore invalid. The court said, by demanding employees sign the TONC, Anderson was enforcing the invalid non-competition agreement by requiring consideration of it.

The court agreed with plaintiff Raymond Edwards II that demanding he sign the TONC constituted intentional interference with economic advantage.

Edwards was hired by Arthur Anderson in 1997 and signed a non-competition agreement at that time. Arthur Anderson stopped practicing in 2002 as a result of their conviction in the Enron scandal.

At the time the company stopped its practice, it sold its businesses to various competitors. Edwards’ division was sold to HSBC. As a condition of employment, HSBC required a signed release between employees and Arthur Anderson. When Arthur Anderson crafted its release, it conditioned the employees’ termination and release from the non-competition agreement on employees giving up the right to pursue any claims against the firm or to disparage against the firm.

Edwards refused to sign the TONC at which time he was terminated from Arthur Anderson without severance benefits and his employment offer from HSBC was retracted. He then brought suit against Arthur Anderson.

The opinion in Edwards II v. Arthur Andersen LLP is here .