CA High Court Brightens Rule Against Non-Compete Pacts

In a ruling long awaited by the employment law sector, the California Supreme Court effectively rejected the use of most non-competition agreements in California. In Edwards v. Arthur Andersen, S147190 (Aug. 7, 2008), the unanimous court held that a state statute with roots in 19th-century laws gives California workers great freedom to switch jobs, to compete against old employers and to solicit former clients.

With its decision in Edwards, the court rejected recent Ninth Circuit findings that California's Business and Professions Code ' 16600 contained a “narrow restraint” exception that allowed companies to use non-compete agreements so long as the pacts only restricted “a small or limited part” of their employees' future ability to work.

The Case

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 Arthur Andersen then fired Edwards, and HSBC rescinded its job offer.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.

The high court rejected Andersen's argument that it “should adopt a narrow-restraint exception to ' 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under ' 16600.” The California Supreme Court largely upheld a 2006 ruling by the state's 2nd District Court of Appeal that sided with Edwards.

Cheryl Miller is a reporter for The Recorder, a California affiliate of this newsletter.

In a ruling long awaited by the employment law sector, the California Supreme Court effectively rejected the use of most non-competition agreements in California. In Edwards v. Arthur Andersen, S147190 (Aug. 7, 2008), the unanimous court held that a state statute with roots in 19th-century laws gives California workers great freedom to switch jobs, to compete against old employers and to solicit former clients.

With its decision in Edwards, the court rejected recent Ninth Circuit findings that California's Business and Professions Code ' 16600 contained a “narrow restraint” exception that allowed companies to use non-compete agreements so long as the pacts only restricted “a small or limited part” of their employees' future ability to work.

The Case

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.

The high court rejected Andersen's argument that it “should adopt a narrow-restraint exception to ' 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under ' 16600.” The California Supreme Court largely upheld a 2006 ruling by the state's 2nd District Court of Appeal that sided with Edwards.

Cheryl Miller is a reporter for The Recorder, a California affiliate of this newsletter.