The California Supreme Court’s recent decision in Edwards v. Arthur Andersen LLP (2008 WL 3083156 (Cal.), filed August 7, 2008) contains two important rulings that should be noted by California employers and their attorneys. First, the court gave a strong affirmation of the doctrine that, in California, employee non-competition clauses are prohibited under the plain language of Business & Professions Code § 16600, unless they are subject to specific and very narrow statutory exceptions. Second, the court held that a contractual provision releasing “any and all” claims against an employer may not encompass non-waivable statutory protections, including those indemnification protections afforded employees by Labor Code § 2802.

When Certified Public Accountant Raymond Edwards became an employee of Arthur Andersen LLP, he signed a non-compete clause in which he agreed not to work for any of Andersen’s clients or solicit any of Andersen’s clients as his own for limited periods following any future termination of his employment. As Arthur Andersen’s practice in the United States came under fire through government indictments in 2002, Andersen sold its tax practice where Edwards worked to a division of HSBC USA, Inc. (HSBC). HSBC then required Edwards to sign a “Termination of Non-Compete Agreement” (TONC) in order to begin his employment there. 

Among other things, the TONC required Edwards to release Andersen from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to [his] employment by, association with or compensation from [Andersen].” In return, Andersen offered to accept Edward’s resignation and release him from the 1997 non-competition agreement. Edwards refused to sign the TONC. As a result, HSBC withdrew Edwards’ employment offer, and Andersen terminated his employment. Andersen also withheld severance benefits Edwards believed he was entitled to receive. 

Edwards then sued Andersen, HSBC and one other defendant for intentional interference with prospective economic advantage and violations of the Cartwright Act. Edwards alleged that the non-compete clause Andersen asked him to sign violated California Business & Professions Code § 16600. He also alleged that the TONC’s release of “any and all” claims against Andersen was invalid, as it removed his non-waivable right to indemnification against his employer, and therefore violated Labor Code § 2802. Edwards settled with all parties except Andersen.

At trial, Andersen prevailed with respect to Edwards alleged violations of both Business and Professions Code § 16600 and Labor Code § 2802. On appeal, the California Court of Appeal held that the non-competition agreement violated Business and Professions Code § 16600 and that the purported release of Edwards’ indemnification rights violated Labor Code § 2802.

The California Supreme Court granted review. Relying on a course of legal reasoning spanning more than a century of precedent, the court held that only very narrow exceptions existed to Business and Professions Code § 16600, and that the non-competition agreement did not fit into any of the exceptions. (Id. p. 11.) Section 16600 states that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Expressly excepted from this rule are non-competition agreements in the sale or dissolution of corporations, partnerships and limited liability companies. The court reaffirmed the legislative intent to protect “the important legal rights of persons to engage in the businesses and occupations of their choosing.” (Id.p. 7). The justices held, “[u]nder the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business” unless the proposed restriction “falls within one of the exceptions to the rule.” (Id., pp. 8-9.) The court added that a restraint or limitation was in violation of Section 16600 even if the restriction did not require a total suffocation of Edwards’ ability to practice his trade or profession.  (Id., p. 13.)

The court’s analysis of the issue involving Labor Code § 2802 was even more straightforward, concluding simply that because an employee’s indemnification rights vis-à-vis his employer are not waivable, the ambiguous language of the “any and all” clause did not and could not apply to Edwards’ indemnification rights. (Id., p. 21.) The California Supreme Court held that such an interpretation would make the clause illegal (per Labor Code § 2804) and such a construction was judicially disfavored. (Id., pp. 15-16.)

Drew Hansen
hansen.drew@arentfox.com
213.443.7536

James Conolly
conolly.james@arentfox.com
213.443.7517

Mark Phillips
phillips.mark@arentfox.com
213.443.7537