Noncompetes Invalid under California Law

August 8, 2008 ( - The California State Supreme Court has ruled that noncompetition agreements violate state law even if narrowly drawn.

Though agreeing with a prior appellate court ruling that a noncompetition agreement between Arthur Andersen and former employee Raymond Edwards II was invalid, the high court disagreed that the termination of noncompetition agreement (TONC) required by Arthur Anderson was also invalid. The case was remanded for additional proceedings.

Rejecting a federal appellate court’s decision that the non-competition agreement fell within a “narrow restraint doctrine” of the California labor law, California’s 2 nd  Division Court of Appeal 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 that the portion of the agreement restricting the sharing of trade secrets was an exception to the state labor law.

The appellate court then agreed with Edwards that demanding he sign the TONC constituted intentional interference with economic advantage (See CA Court Rules Non-competition Agreement Invalid ). On this point the state Supreme Court disagreed saying, “[W]e conclude that the TONC at issue in this case did not purport to release Andersen from any nonwaivable statutory claims and therefore is not unlawful under Labor Code sections 2802 and 2804.”

Arthur Anderson stopped practicing in 2002 as a result of its conviction in the Enron scandal, and sold its businesses to various competitors. Edwards’ division was sold to HSBC, which as a condition of employment, 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 and was terminated from Arthur Anderson without severance benefits. His employment offer from HSBC was retracted, and he then brought suit against Arthur Anderson.

The high court’s decision is here .