Morgan Miller Blair

On August 7, 2008, the California Supreme Court issued a decision clarifying that most employee non-competition agreements are void. 

In Edwards v. Arthur Andersen, the Court examined an employment agreement between Arthur Andersen and one of its former tax manager employees, Raymond Edwards.  The agreement contained a typical non-competition clause, prohibiting Edwards from working for or soliciting Arthur Andersen clients for limited periods after his employment ended.  Edwards later alleged that the non-competition agreement violated Business and Professions Code section 16600, which states: “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 trial court ruled in favor of Arthur Andersen, but the court of appeal reversed, finding for Edwards.

The Supreme Court largely affirmed the ruling of the court of appeal, holding that the non-competition agreement was void.  The Court emphasized California’s strong public policy favoring open competition and employee mobility, and determined that non-competition agreements are permissible only if they fit within one of the statutory exceptions to section 16600.  Those exceptions authorize non-competition agreements in connection with the sale or dissolution of corporations, partnerships, and limited liability companies.  None of those exceptions were present in the Edwards case. 

The Supreme Court also rejected the “narrow-restraint” exception to section 16600 that had been developed by the federal Ninth Circuit court of appeals.  Under the narrow restraint exception, the Ninth Circuit had upheld non-competition agreements “where one is barred from pursing only a small or limited part of the business, trade or profession.”  In Edwards, however, the Supreme Court rejected the narrow restraint exception (and the California Supreme Court’s interpretation of a state statute trumps the Ninth Circuit’s).  The Court recognized only the statutory exceptions to section 16600 (discussed above), and held that all non-competition agreements not fitting into one of those statutory exceptions were void, regardless of whether they were “narrowly drawn.” 

Notably, the Court declined to address “the applicability of the so-called trade secret exception to section 16600[.]”  This leaves the door open for employers to rely on California’s Uniform Trade Secrets Act to prevent departing employees from using confidential company information (which sometimes includes client lists).

In light of the Supreme Court’s holding in Edwards, California employers can take away two important lessons:

• Non-competition agreements are void in California, unless they are tied to the sale or dissolution of a business.
• Robust trade secret protection may be the best leverage for preventing harmful conduct by departing employees.