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California's Edwards v. Arthur Andersen Decision And The Future for Employee Noncompetition Agreements And Other Post-Employment Restraints

David J. Murphy, James Pooley Trade Secrets Report, August 2008 In a closely watched decision issued on August 7, 2008, the California Supreme Court in Edwards v. Arthur Andersen unanimously determined that a provision in an employment agreement restricting an employee from serving customers or competing with a former employer was invalid under California Business & Professions Code section 16600, which contains California's general statutory prohibition for noncompetition agreements. As the Supreme Court held, noncompetition agreements between an employer and employee that even just "partially" or "narrowly" restrict an employee's ability to practice the employee's trade or profession are prohibited, contrary to what the Ninth Circuit and other federal courts had previously approved as reflecting California law. The Supreme Court's Decision: Rejection Of The Narrow Restraint Doctrine Arthur Andersen's noncompetition agreement restrained Edwards from: (1) performing work for clients he had previously serviced at Andersen for 18 months following the termination of his employment; and (2) soliciting any client of his office for 12 months after his termination. Arthur Andersen argued that "only contracts that totally prohibit an employee from engaging in his or her profession, trade or business are illegal," based on the "narrow restraint" exception found in Ninth Circuit decisions. See Campbell v. Trustees of Leland Stanford Jr. Univ., 817 F.2d 499 (9th Cir. 1987) (preventing use of certain psychological tests); IBM Corp. v. Bajorek, 191 F.3d 1033 (9th Cir. 1999) (restricting work for only one competitor); General Comm. Packaging v. TPS Package 126 F.3d 1131(9th Cir. 1997) (restricting work for only one customer and related entities introduced through that relationship). The Court rejected Arthur Andersen's argument and the Ninth Circuit's interpretation of California law, explaining under 16600's plain terms, no "restraint" on lawful competition would be tolerated; and it was no answer to say that a restriction was not a "prohibition."

Full post as published by The Trade Secrets Vault on September 28, 2008 (boomark / email).