We recognize that many Massachusetts- and New England-based companies have employees in California, and therefore wanted to make you aware of a recent decision from California’s Supreme Court holding that noncompetition agreements are invalid under California law, even when they are carefully drafted to prohibit only certain competitive activity.
In Edwards v. Arthur Andersen LLP, the Court addressed the validity of noncompetition agreements in California and the permissible scope of agreements to release claims against an employer. Edwards, an accountant, was hired as a tax manager by the Los Angeles office of Arthur Andersen. He was required upon hire to sign a noncompetition agreement prohibiting him, for an 18-month period, from performing services of the type he had provided while at Andersen, for any client on whose account he had worked 18 months prior to his termination, and it prohibited him, for a year after termination, from soliciting any client of Andersen’s Los Angeles office. Thus, the provision was narrower than a typical noncompetition restriction, in that it barred only his work for clients he had been assigned to during his employment.
In 2002, Andersen began selling off practice groups, and HSBC USA, Inc. purchased a portion of Andersen’s tax practice, including Edwards’ group. However, before it hired any Andersen employees, HSBC required them to execute a “Termination of Noncompete Agreement” (TONC), in which Andersen agreed to terminate the non-competition agreements in exchange for employees’ release of any and all claims, including claims related to their employment.
Edwards refused to sign the TONC, partly because he believed that it required him to give up his right to indemnification, which he considered important in light of a pending governmental investigation. Andersen terminated Edwards’ employment, and HSBC did not offer him employment.
Edwards sued Andersen arguing that the noncompetition agreement violated Section 16600 of the California Business and Professions Code (“Section 16600”), which prohibits restraints on the practice of a profession, business or trade (subject to certain limited exceptions).
Relying on rulings from the federal Ninth Circuit Court of Appeals that a narrowly tailored noncompetition agreement may be valid under California law, the trial court ruled that the noncompetition agreement was valid because it did not deprive Edwards of his right to pursue his profession. A California Appeals court disagreed, ruling that the noncompetition agreement was invalid.
The California Supreme Court agreed and, in doing so, finally repudiated the “narrow restraint” concept previously accepted by some federal judges. It held that the Arthur Andersen noncompetition agreement violated Section 16600, because it restricted Edwards from performing work for Andersen’s Los Angeles clients and did not fall within the limited exception for agreements related to the sale of a business. The Court explained that Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it would have included language to that effect. The Court also suggested that a customer nonsolicitation provision is unenforceable unless necessary to protect confidential information or trade secrets.
The import of this case for employers based outside of California with California-based employees is clear. Unless one of the very narrow statutory exceptions applies, companies cannot require their employees based in California to sign noncompetition agreements, however narrowly drafted they may be.