California Supreme Court Will Soon Decide Permissible Scope of Non-Compete Agreements
Oral argument before the California Supreme Court is scheduled for May 27 in the Edwards v. Arthur Andersen case, which addresses the permissible scope of non-compete agreements in California. In Edwards, Plaintiff Edwards, a tax manager at Arthur Andersen ("Andersen") in Los Angeles, provided income and estate planning services to wealthy individuals. Edwards was required to sign Arthur Andersen's standard non-compete agreement when he was hired. The agreement prohibited Edwards, for an eighteen month period after his departure from Arthur Andersen, from performing professional services of the type he provided at Arthur Andersen for any client on whose account he had worked during eighteen months prior to his departure. It also prohibited Edwards, for a year after his departure, from providing professional services to any client of Arthur Andersen's Los Angeles office. In 2002, Arthur Andersen sold its Los Angeles office to HSBC, and as a condition of being hired by HSBC, Edwards was required to sign a release of claims in favor of Arthur Andersen in exchange for Arthur Andersen’s agreement to relieve Edwards of his non-compete restrictions. Edwards refused to sign the release agreement and was not hired by HSBC as a result. Edwards then brought an action against Arthur Andersen, claiming in part that the non-compete agreement was invalid under California law and therefore it was unlawful to condition his employment with HSBC on his execution of the release agreement. The trial court disagreed with Edwards and held that the non-compete agreement was valid because it fit within the "narrow restraint" exception, which permits covenants not to compete where the covenant is narrowly crafted so that an employee who leaves a company still can work in his or her profession. The trial court noted that given the large number of wealthy individuals in Los Angeles, preventing Edwards from performing services for a period of time for individuals who were clients of Arthur Andersen, was not a significant restriction on Edwards’ ability to work.
Edwards successfully appealed the trial court's decision. The California Court of Appeal held that there is no "narrow restraint" exception under California law, and that Edwards’ non-compete agreement was, therefore, invalid. According to the court, California prohibits non-compete agreements, no matter how narrow the restraints on competition are, except in a few limited circumstances outlined by statute involving the sale of a business, or where necessary to protect an employer's trade secrets. The Court of Appeal reasoned in part that allowing narrowly restrained non-compete agreements would give employers an incentive to draft agreements that "push the envelope of the narrowness requirement" and employees would not be able to determine on their own whether the restraint was enforceable.
Arthur Andersen petitioned for review by the California Supreme Court, and the Court granted review in November 2006. The matter is now fully briefed and is scheduled for oral argument later this month. A decision is expected shortly thereafter on this important issue for California employers.