By Anthony J. Oncidi and Jeremy Mittman
Proskauer Rose LLP
In a significant new opinion with far-reaching implications, the California Supreme Court in Edwards v. Arthur Andersen LLP,[1] has expressly parted company with the overwhelming majority of jurisdictions – both in the United States and throughout the world – ruling that noncompetition agreements are invalid in all but a few limited exceptions. Further, California’s high court determined that an employer’s use of even an unenforceable non-compete may hand an employee a tort claim that can be asserted against the employer for its attempted interference with the employee’s prospective economic advantage.
As a condition of his employment with Arthur Andersen (the now defunct “big five” accounting firm), Edwards was required to execute a noncompetition agreement that prohibited his working for any Andersen client for 18 months post-termination as well as his soliciting Andersen clients and employees. When HSBC purchased Edwards’s work unit, he was asked to sign another agreement requiring him to resign voluntarily from Andersen and to release the firm from “any and all” claims in exchange for its agreement to forgo enforcement of the original noncompetition agreement. Edwards refused to sign the agreement and was terminated as a result.
In Edwards’ subsequent lawsuit against Andersen and HSBC, the lower court ruled in favor of defendants, finding the agreement to be enforceable under the so-called “narrow restraint” exception to the broad statutory prohibition against non-competes under California law. The trial judge reasoned that because Andersen only sought to prevent Edwards from working on or soliciting the particular accounts he had serviced or been exposed during his final 18 months at Andersen, the restraint did not significantly hamper his freedom of mobility or opportunities for reemployment – hence, it was simply a “narrow restraint.”
Edwards appealed, arguing that even the partial restraint Andersen sought to impose was incompatible with the plain language and spirit of California’s noncompete statute, which provides that “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 court of appeal agreed with Edwards, holding that the so-called “narrow restraint” exception was irreconcilable with precedent and a distortion of the statute itself. In affirming this part of the court of appeal’s judgment, the Supreme Court noted that California courts have historically read the noncompete statute as expressing a fundamental public policy favoring employee mobility and enterprise over a former employer’s economic security.
Edwards is very good news for California employers that find themselves hiring more key employees than they lose because non-competes and customer non-solicitation provisions will presumably be treated as a nullity by any state or federal court applying California law. Indeed, simply including such provisions in an employment agreement may give an employee leverage to assert that the employer has tortiously interfered with his or her prospective economic advantage.
Multinational employers with operations outside of California should take heed of Edwards as well because California courts are reluctant to apply choice-of-law and forum-selection provisions that might adversely affect a California employee’s substantive rights. When an employer loses an employee who has signed a non-compete or non-solicitation agreement to a California employer, there is a fairly good chance the new employer will file a declaratory relief action in California, relying on Edwards and seeking to invalidate the agreement. In such cases, the former employer should consider initiating litigation in its home jurisdiction, seeking to enforce the provision. One thing is certain – that is that the California Supreme Court’s new opinion in Edwards affects all employers with employees located in or destined for California (a state in which nearly one in every six U.S. employees lives and works) and should be considered carefully when hiring or shedding employees.
[1] 44 Cal. 4th 937 (2008)
