The California Supreme Court has rejected the "narrow-restraint" exception to California's general prohibition on noncompetition agreements, maintaining that all noncompete restrictions must comply with the express terms of California Business & Professions Code section 16000, et seq. Edwards v. Arthur Andersen LLP (2008 S147190). The narrow restraint exception which had been recognized by some federal courts in California, permitted limited restrictions if the employee was still permitted to compete in "a substantial portion of the market." The court also held that a contractual provision which releases "any and all claims" by an employee does not include non-waivable statutory protections.

Raymond Edwards II, a former tax manager who worked in the Los Angeles office of the accounting firm Arthur Andersen ("Andersen"), signed a noncompetition agreement that prohibited him from working for or soliciting Andersen clients for a stated period following his departure from the company. After Andersen became embroiled in the Enron accounting scandal, Andersen sold its Los Angeles tax group to HSBC. As part of the transaction, HSBC offered Edwards a job on the contingency that Andersen release Edwards from the noncompetition agreement. In turn, Edwards would have to sign a Termination of Non-compete Agreement ("TONC") that included a release of all claims that he might have against Andersen arising out of his employment relationship with them. Edwards refused to sign the TONC. Andersen then terminated Edwards' employment and HSBC rescinded their job offer.

Edwards sued Andersen alleging that Andersen's noncompetition agreement violated California Business & Professions Code section 16600 and was unenforceable. The Supreme Court held that the Andersen noncompetition agreement was invalid, stating that it did not embrace the "narrow-restraint" exception to California's general prohibition on non-competition agreements. Section 16600, et seq, provides that noncompetition agreements are permissible only where a person sells the goodwill of a business, an owner of a business disposes of all of his or her ownership interest in a business, or a partner, in anticipation of dissolution of a partnership, agrees not to compete.

Edward's lawsuit also alleged that the TONC's release of "all claims" violated California Labor Code sections 2802 and 2804, which make an employee's right to indemnification from his or her employer nonwaivable. The court held that rights, such as those provided for under Labor Code section 2802, are nonwaivable and that "any waiver that attempts to waive those rights is unlawful." The court found that the waiver in the TONC at issue was lawful, however, because despite its "any and all" claims language, the TONC did not expressly reference waiver of any nonwaiveable right. The court further held that voiding all existing releases which include "any and all" language would be inappropriate because, among other reasons, the laws of contract interpretation favor reading an agreement as "lawful, operative, definite, reasonable, and capable of being carried into effect."

Impact on Employers

  • Noncompetition agreements with California employees are generally disallowed, even if narrowly tailored, unless they fall within an enumerated exception set forth in California Business & Professions Code section 16600, et seq.
  • Agreements in California whereby an employee releases "any and all" claims against an employer are not inherently void, but they do not release nonwaivable statutory rights. Agreements that expressly attempt to waive such nonwaivable statutory rights would be void.