California Supreme Court Reinforces Employees’ Right to Compete Post-Employment
Topics: Court Decisions
Today the California Supreme Court issued its much anticipated decision in Edwards v. Arthur Andersen and held that California law prohibits agreements restraining competition, regardless of how narrow or reasonable the restraint may be. The Court flatly rejected the “narrow restraint” exception that California federal courts have in some instances applied to uphold agreements limiting an employee's ability to compete.
The Court explained that under the “plain meaning” of California Business and Professions Code section 16600, “an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule” [referring to statutory exceptions that allow non-compete agreements in the context of a sale or dissolution of a corporation, partnership, or limited liability company]. The Court declined to read into the statute an exception permitting narrow, reasonably tailored restraints on competition: “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.”
Based on this interpretation of section 16600, the Court held that the non-compete agreement Arthur Andersen required Edwards to sign was invalid. The agreement at issue prohibited Edwards from performing professional services for certain clients of Arthur Andersen for a period of 18 months post-termination. The Court explained that this provision clearly restrained Edwards' ability to practice his professions and was, therefore, invalid under section 16600.
Notably, the Court did not address the enforceability of restrictions tied to the protection of trade secrets (such as provisions prohibiting an employee from using the employer's trade secrets to solicit customers), or restrictions against recruiting co-workers to work for a competitor. The Court did, however, cite with approval Thompson v. Impaxx, Inc., 113 Cal.App.4th 1425 (2003), which held that non-solicitation of customer provisions are only lawful to the extent they are tied to the protection of trade secrets. Thus, although the Court's decision does not directly address the validity of traditional non-solicitation of customer provisions, it certainly does not disturb California precedent holding that such provisions are only enforceable if tied to trade secrets.
California employers who require employees to sign “non-interference” and/or “non-compete” type agreements should ensure that such agreements do not run afoul of section 16600, as strictly interpreted by the California Supreme Court.