Thursday, August 31, 2006
Non-Competition Contracts Invalid Even if Narrowly Drawn—C.A.
By TINA BAY, Staff Writer
Non-competition agreements between employees and employers that bar the employee from performing services for the employer’s clients are invalid even if narrowly drawn, this district’s Court of Appeal ruled yesterday.
Partially reversing a judgment by Los Angeles Superior Court Judge Andria K. Richey, Div. Three unanimously reinstated the claim of a former Arthur Andersen LLP employee who lost his job in connection with his noncompetition agreement with the firm.
Writing for the court, Justice Richard D. Aldrich said in the published portion of the opinion that unless a noncompetition contract falls within statutory or “trade secret” exceptions to the Business and Professions Code’s prohibition on such agreements, it is invalid “even if the restraints imposed are narrow and leave a substantial portion of the market open to the employee.”
Raymond Edwards II, a certified public accountant, sued Andersen in 2003 following his termination for refusing to sign a broad release of liability the firm demanded in exchange for his release from a previously executed noncompetition agreement.
Edwards joined the former big five accounting firm’s Los Angeles office as a tax manager in 1997, and provided income, gift, and estate planning services to its high net worth clients. His employment with Andersen had been contingent on his signing a noncompetition agreement, required of all the firm’s managers, which prohibited him from working for certain categories of Andersen clients for either 12 or 18 months after leaving the firm.
In 2002, Andersen sold its Los Angeles tax practice to HSBC amidst the Securities and Exchange Commission’s investigation of Enron Corporation. As a condition of the HSBC transaction closing, Andersen required Edwards to execute a “Termination of Non-Compete Agreement” that released Andersen from “any and all” claims relating to Edwards’ employment with the firm, and required him to preserve confidential information indefinitely.
In exchange for signing the TONC agreement, Andersen would agree to Edwards’ resignation from Andersen and employment by HSBC, and release Edwards from the 1997 noncompetition agreement.
When Andersen fired Edwards after he refused to sign the TONC agreement, Edwards filed a lawsuit against his former employer that included a claim for intentional interference with prospective economic advantage. He contended that Andersen committed a “wrongful act” for purposes of an intentional interference claim, both by demanding that he sign the TONC as consideration for release from the noncompetition agreement, and requiring him to sign the noncompetition agreement in the first place.
To establish his intentional interference claim, Edwards had the burden of proving along with four other elements, that Andersen committed “an intentional act by the defendant, designed to disrupt the relationship” between Edwards and HSBC.
Richey granted Andersen’s pre-trial motion to sever the issue of the noncompetition and TONC agreements’ enforceability as a matter of law, and ultimately concluded they were valid.
In dismissing Edwards’ intentional interference claim, Richey adopted the Ninth Circuit’s “narrow restraint” exception to employee noncompetition agreements under California law, noting:
“[T]here were more than enough of these wealthy folks…in L.A. for all CPA’s to do the kind of work [Edwards] was doing. So there wasn’t any significant restriction on his ability to work. There wasn’t even perhaps any minimal restriction on his ability to work.”
The appellate court concluded that the “narrow restraint” doctrine was an incorrect gloss on the prohibition against employee noncompetition agreements, found in Business and Professions Code Sec. 16600.
“If the Legislature had intended section 16600 to apply only to restraints which were unreasonable or overbroad, it could certain have included language to that effect,” Aldrich said, noting the existence of several express statutory exceptions to the bar.
Edwards’ agreement with Andersen, the justice explained, did not fall within those express exceptions or within the long-recognized exception for trade secrets, and therefore was invalid even though it was limited in time and scope.
Moreover, Aldrich wrote:
“Using the invalid noncompetition agreement to coerce Edwards into forfeiting rights was no less wrongful than terminating an employee who refuses to sign such an agreement. To hold otherwise would be to elevate form over substance and ignore the practical realities of the situation.”
Counsel for both sides told the MetNews they could not comment on the decision at this time.
Edwards’ attorney, Richard A. Love, remarked only generally that he was “gratified that the court clarified the law.”
The case is Edwards v. Arthur Andersen, B178246.
Copyright 2006, Metropolitan News Company