Thursday, November 30, 2006
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S.C. to Rule on Enforcement of Non-Compete Clauses
By a MetNews Staff Writer
The state Supreme Court yesterday agreed to decide whether a narrowly drawn agreement barring an employee from performing services for a client of his or her employer may be enforceable under California law.
The justices, at their weekly conference in San Francisco, unanimously agreed to review the Aug. 10 ruling of Div. Three of this district’s Court of Appeal in Edwards v. Arthur Andersen LLP, B278246.
The Edwards court held that an employee who was denied a release from a previously signed non-compete agreement has a valid claim against the former employer. The panel rejected a Ninth U.S. Circuit Court of Appeals decision interpreting Business and Professions Code Sec. 16000, which renders most non-compete agreements between employers and employees invalid, as being subject to a “narrow restraint” exception.
Writing for the court, Justice Richard D. Aldrich said that unless a noncompetition contract falls within statutory or “trade secret” exceptions to the code section, 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 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, for which Andersen provided accounting services. 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 said it would agree to Edwards’ resignation from Andersen and employment by HSBC, and would 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, Aldrich explained.
Los Angeles Superior Court Judge Andria 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, 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.”
But the Div. Three panel concluded that the “narrow restraint” doctrine was an incorrect gloss on the prohibition found in 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.”
In other conference action, the court unanimously denied review of a First District Court of Appeal ruling that labor arbitrators are not inherently precluded from interpreting statutes. That case is California Correctional Peace Officers Association v. State of California, A112311.
Copyright 2006, Metropolitan News Company