Edwards v. Arthur Andersen LLP

Supreme Court of California
44 Cal.4th 937 (2008)

ELI5:

Rule of Law:

California Business and Professions Code section 16600 broadly prohibits employee noncompetition agreements, regardless of their narrowness or reasonableness, unless they fall within a specific statutory exception. A contract requiring an employee to release 'any and all' claims is not inherently unlawful, as it is presumed to exclude nonwaivable statutory rights like employee indemnification.

Facts:

In January 1997, Raymond Edwards II, a certified public accountant, was hired by the accounting firm Arthur Andersen LLP.
As a condition of employment, Edwards was required to sign a noncompetition agreement.
The agreement prohibited Edwards for 18 months post-employment from performing professional services for any Andersen client he had worked on during his final 18 months at the firm.
The agreement also prohibited him for 12 months from soliciting any client of Andersen's Los Angeles office.
In 2002, following the Enron scandal, Andersen began selling its practice groups; Edwards's group was to be purchased by HSBC USA, Inc.
HSBC offered Edwards a job, but the offer was contingent on him signing a 'Termination of Non-compete Agreement' (TONC) provided by Andersen.
The TONC required Edwards to release Andersen from 'any and all' claims in exchange for Andersen releasing him from the 1997 noncompetition agreement.
Edwards refused to sign the TONC, which resulted in Andersen terminating his employment and HSBC withdrawing its job offer.

Procedural Posture:

Raymond Edwards filed a complaint in a California trial court against Arthur Andersen for intentional interference with prospective economic advantage.
The trial court conducted a bifurcated trial focused solely on the legal question of the enforceability of the noncompetition agreement and the TONC.
The trial court ruled in favor of Andersen, concluding the noncompetition agreement was valid because it was narrowly tailored and the release was not unlawful.
Edwards, as appellant, appealed the judgment to the California Court of Appeal.
The Court of Appeal reversed the trial court, holding that both the noncompetition agreement and the TONC were invalid as a matter of law.
The California Supreme Court granted Andersen's petition for review.

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Issue:

Does California Business and Professions Code section 16600 prohibit employee noncompetition agreements unless the agreement falls within a statutory exception?

Opinions:

Majority - Chin, J.

Yes. Business and Professions Code section 16600 prohibits employee noncompetition agreements unless they fall within a specific statutory exception. The court reasoned that section 16600 embodies a clear legislative public policy favoring open competition and employee mobility, rejecting the common law 'rule of reasonableness.' The statute's language, 'every contract by which anyone is restrained... is to that extent void,' is unambiguous and does not allow for judicial exceptions for 'narrowly tailored' restraints. The court explicitly rejected the Ninth Circuit's 'narrow-restraint' exception, affirming that the only permissible exceptions are those expressly listed in the statute. On a secondary issue, the court held that the TONC's provision releasing 'any and all' claims was not unlawful, because such broad releases are interpreted to automatically exclude nonwaivable statutory rights (like an employee's right to indemnification under Labor Code section 2802), as existing law is presumed to be incorporated into contracts.

Concurring-in-part-and-dissenting-in-part - Kennard, J.

This opinion concurs with the majority that the noncompetition agreement is void under Business and Professions Code section 16600. However, it dissents from the majority's conclusion regarding the validity of the Termination of Non-compete Agreement (TONC). The dissent argues that the TONC was not a vague general release but instead used language that specifically tracked the indemnity statute by requiring the release of 'losses' and 'expenses' arising from employment. This drafting suggests Andersen deliberately sought to mislead employees into believing they had waived nonwaivable rights. This 'in terrorem' effect is itself a wrongful act, even if the waiver is legally void, and Andersen's insistence that Edwards sign it should support his tort claim.

Analysis:

The Edwards decision solidified California's position as one of the most prohibitive states regarding employee non-competes, establishing that Business and Professions Code section 16600 is a near-absolute ban. It definitively rejected the 'narrow restraint' doctrine that had been applied by federal courts, creating a clear rule for both state and federal courts applying California law. This ruling provides certainty for employees and employers, effectively invalidating a wide range of non-solicitation and other restrictive covenants that might be permissible in other states. The court's secondary holding also provided practical guidance, assuring employers that standard 'any and all claims' release language is not per se illegal for failing to list every nonwaivable right.

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