The Supreme Court of California recently ruled that even limited noncompetition agreements are unenforceable in California, unless they fall within one of three narrow statutory exceptions (exempting noncompetition agreements in connection with the sale or dissolution of a corporation, partnership, or limited liability corporation). Edwards v. Arthur Andersen LLP, ___ Cal. 4th ___, 2008 Cal. LEXIS 9618 (Cal. Aug. 7, 2008) (No. S147190). The Supreme Court’s decision upheld earlier rulings by California courts and disagreed with the United States Court of Appeals for the Ninth Circuit. In the same case, the Supreme Court also ruled that release agreements incorporating the language “any and all” claims are valid even though they do not expressly exclude nonwaivable statutory claims. California Business and Professions Code section 16600 states that, “Except 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.” The Supreme Court’s opinion reviewed California case law addressing section 16600 and concluded: “In sum, following the Legislature, this court generally condemns noncompetition agreements.” However, the Court expressly declined to address the applicability of the “so-called trade secret exception,” which was not at issue in the case.
While there is little confusion by California courts over California’s public policy against noncompetition agreements, some federal courts have applied a “narrow-restraint” exception to the rule which allowed noncompetition agreements that were narrowly tailored and did not entirely preclude a party from pursuing his or her trade or business. The Supreme Court rejected this federal exception stating, “Section 16600 is unambiguous, and if the Legislature intended the statue to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.”
The Supreme Court’s decision may have little practical impact, since many California employers are aware of California’s strict stance on noncompetition agreements and have avoided them for that reason. However, employers should be aware that noncompetition agreements based on the federal courts’ “narrow-restraint” exception are likely invalid. Employers should consult with counsel before requiring that employees or prospective employees agree to noncompetition provisions. Employers should also consult counsel if an alleged noncompetition agreement is causing problems with a strategic hire as the agreement may be invalid. Finally, employers should be aware that California courts may apply this strict rule against noncompetition agreements between employers and employees outside of California in cases where a former employee seeks employment in California.