The California Supreme Court “generally condemn[ed]” noncompetition agreements in a much-anticipated decision issued at the end of July. In Edwards v. Arthur Andersen LLP, the court established a brighter legal line by rejecting most noncompetition agreements unless they fall within the very narrow statutory exceptions for such agreements. The court also upheld a broad waiver releasing “any and all” claims against an employer, a welcome development that sustains countless existing releases.

Noncompetition Agreements Invalid

In the majority of states, noncompetition agreements (i.e., contractual restraints on the practice of a profession, trade or business) are considered valid to the extent they are determined to be reasonable in terms of location, duration and scope. To the contrary, California has long declared these agreements generally void, favoring “open competition and employee mobility” in place of the “rule of reasonableness.”

Nonetheless, the Ninth Circuit federal court of appeals has construed California law to allow noncompetition agreements if they include only a narrow restraint on the practice of a profession (e.g., by barring the courting of named customers or what are often known as “non solicitation” provisions). In Edwards, however, the court clarified California law by unanimously rejecting the Ninth Circuit’s “narrow-restraint” exception and declaring noncompetition agreements to be prohibited unless they fall within the limited statutory exceptions covering agreements in the sale or dissolution of corporations, partnerships and limited liability corporations.

For these reasons the court declared as invalid a noncompetition agreement that prohibited a former employee from performing similar professional services for clients on whose accounts he had worked during a specified time period, and from soliciting any client of the office where he had worked. The court specifically declined, however, to address the “so-called trade secret exception” to noncompetition agreements and also a clause prohibiting the solicitation of employees, which leaves open those possible avenues for protecting confidential business information.

Bottom Line

As a result of Edwards, California employers are clearly restricted, with very few exceptions, from using noncompetition agreements. It would be advisable for employers to consult with counsel prior to using noncompetition agreements and in order to determine whether current noncompetition agreements continue to be valid. Employers also are advised to review whether they are maximizing protection of confidential information, through documentation, appropriate policies that protect confidentiality and, as needed, trade secret agreements. In particular, employers will want to ensure they are protecting trade secrets as fully as possible under California’s trade secret law.