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CA Supreme Court Holds Non-Competes Are Generally Unenforceable and Release of "Any And All" Claims Not Unlawful

In Edwards v. Arthur Anderson LLP, the California Supreme Court ruled on the following issues: (1) To what extent does Business and Professions Code section 16600 prohibit employee noncompetition agreements; and (2) is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

Noncompetition Agreements
Noncompetition agreements are governed by Business & Professions Code section 16600, which states: “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.” The statute permits noncompetition agreements in the context of sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).

Under the common law, as still recognized by many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.  Andersen argued that California courts have held that section 16600 embrace the rule of reasonableness in evaluating competitive restraints.

The Court disagreed with Anderson, and noted:

We conclude that Andersen’s noncompetition agreement was invalid. As the Court of Appeal observed, “The first challenged clause prohibited Edwards, for an 18-month period, from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination. The second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession.

The Court found that this agreement was invalid because it restrained Edwards’ ability to practice his profession.

However, Anderson argued that section 16600 has a “narrow-restraint” exception and that its agreement with Edwards survives under this exception.  Anderson pointed out that a federal court in International Business Machines Corp. v. Bajorek (9th Cir. 1999) upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. Anderson also noted that another Ninth Circuit federal court in General Commercial Packaging v. TPS Package (9th Cir. 1997) held that a contractual provision barring one party from courting a specific customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude[]” the party from pursuing its trade or business.

In refusing to accept the “narrow-restraint” exception for noncompetition agreements in California, the Court stated:

Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” [citation] Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 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 section 16600.

The Court’s ruling basically eliminates the validity of non-competition agreements under California that are not expressly provided for in Section 16600.

Contract Provision Releasing “Any and All” Claims
The second issues in the case was whether Andersen's condition of Edwards’s obtaining employment that Edwards execute an agreement releasing Andersen from, among other things, “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to [Edwards’s] employment by, association with or compensation from” Andersen.

Edwards argued that Labor Code section 2804 voids any agreement to waive the protections of Labor Code section 2802 (which provides that employers must reimburse employees for all business related expenses that the employee incurs) as against public policy.

The Court noted that Labor Code section 2804 has been interpreted to apply to Labor Code section 2802, making all contracts that waive an employee’s right to reimbursement null and void. Therefore an employee’s right to be reimbursed for business expenses provided under Labor Code section 2802 are nonwaivable, and any contract that does purport to waive an employee’s right would be contrary to the law.  Edwards maintained, therefore, the agreement was an independent wrongful act that would support another claim he was alleged for intentional interference with prospective advantage.

The Court disagreed with Edwards, and concluded that a contract provision releasing “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.  Therefore, such agreements are still valid and enforceable under the law.

Full post as published by California Labor & Employment Defense Blog on August 07, 2008 (boomark / email).