In Edwards v. Arthur Andersen LLP, (Cal. S. Ct. 2008), the California Supreme Court made clear that all non-competition and non-solicitation agreements that are not part of the sale or dissolution of a business entity are invalid under California law. The case began when Raymond Edwards II (“Edwards”), a CPA, was terminated by Arthur Andersen, LLP (“Andersen”). He had signed an agreement providing that:
“if you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation.”
The agreement also included a non-solicitation provision, which provided that:
“for twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the offices to which you were assigned during the eighteen months preceding release or resignation. You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.”
In 2002, when Andersen was indicted and Edwards’ employment ended, he sued Andersen, relying upon the wording of the California Business and Professions Code (Section 16600), which states 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 trial court ruled in Andersen’s favor, finding that the agreement did not violate the state law because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession. However, on appeal, the court of appeals disagreed. Andersen appealed to the California Supreme Court, which affirmed the ruling of the court of appeals and found the agreement invalid.
The California Supreme Court noted that 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.” However, the only exceptions in the statute are agreements in the sale or dissolution of a corporation, partnership or LLC. Although Andersen argued that the word “restrain” means to “prohibit” and not to “limit,” the Court disagreed. The Court noted that the language of the statute was clear and that it did not include language stating that the statute should apply “only to restraints that were unreasonable or overbroad.” Since the agreement “restricted Edwards from performing work for Andersen’s…clients,” it, therefore, “restricted his ability to practice his accounting profession.” The Court noted that Section 16600 “evinces a settled legislative policy in favor of open competition and employee mobility.” The law ensures “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” Accordingly, the Court invalidated the contractual provisions and allowed Edwards to compete and solicit and in doing so, it expressly rejected prior decisions of federal courts in California which held that reasonable non-solicitation provisions, unlike non-competition clauses, were not contrary to public policy.
Alan M. Kaplan notes that human resource professionals should conduct an audit of all of the agreements between their employers and employees working in California. The audit should include a list of all states in which employees work, the names of the employees and a listing of the agreements they have and have not signed. An employer may have simply given its standard agreement to its employees in California, without realizing that Section 16600 existed. Or, the agreements for the employees in California may include a nonsolicitation provision, which is now invalid. After the initial audit, employers should determine their protectable interests, including the protection against the use and disclosure of confidential information and trade secrets. In addition, employers should protect themselves against current and former employees who may interfere with their contracts and their current and prospective business relationships. Lawful and enforceable agreements throughout the United States and in California include provisions that provide for the assignment of inventions and protect against the use and disclosure of confidential information and trade secrets. In most states, enforceable provisions include those protecting against non-competition and non-solicitation, but these provisions should include reasonable restrictions. An employer can protect its’ interests, but only after analyzing those interests to determine the types of provisions necessary, drafting and distributing enforceable agreement and taking steps to implement the agreements can an employer protect is interests.