California State Court Disagrees with Ninth Circuit, Holding that Even "Narrow Restraint" on Competition Violates State Non-Compete Prohibition

Case: Edwards v. Arthur Andersen LLP, No B178246 (Cal. 2d App. Dist. August 30, 2006)

The One Sentence Summary: A non-compete contract prohibiting a former employee from soliciting the customers of his former employer was an invalid restraint on competition under section 16600 of the California Business and Professions Code even though it was narrowly tailored, and forcing the employee to sign an agreement releasing him from the non-compete as a condition of new employment formed the basis of a claim for intentional interference with prospective economic advantage.


What They Were Fighting About: Plaintiff Edwards had signed a non-compete and non-solicitation contract with his former employer, Arthur Andersen LLP. When Andersen folded after its conviction in the Enron case, many of the Los Angeles employees of Andersen went to HSBC. As a condition of employment with HSBC, HSBC and Andersen required that the employees sign agreements with Andersen waiving claims against Andersen, releasing the employees from their non-compete obligations, and promising not to disparage Andersen. Edwards refused to sign, and sued Andersen and HSBC for intentional interference with prospective economic advantage and violation of the Cartwright Act. The trial court ruled for Andersen without hearing evidence.

California Appellate Court Holdings:

• The noncompetition agreement was invalid under Bus. & Prof. Code § 16600 as a restraint from engaging in a lawful possession or trade.
• Bus. & Prof. Code § 16600 allows covenants not to compete in limited instances, such as for the protection of trade secrets, but none of these exceptions were implicated.
• The non-compete agreement prohibited performing professional services for clients serviced while at Andersen and soliciting these clients. Both provisions were invalid under Bus. & Prof. Code § 16600.
• The "narrow restraint" exception created under federal court interpretations of Bus. & Prof. Code § 16600 was a misapplication of California law. The plain language of the statute does not include this exception, and the presence of other express exceptions to the law implies that other exceptions were not intended by the legislature. Moreover, allowing "narrow restraints" was bad policy in that it encourages employers to push the boundaries and imposes unfair burdens and risks on employees.
• Requiring execution of the new agreement as consideration for release of the non-compete violated public policy and constituted an independent wrongful act for the intentional interference claim.
• The termination of non-compete agreement was also wrongful in that it provided for a release of the employee's statutory right to indemnity.