Friday, August 8, 2008
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S.C. Places Strict Limits on Noncompetition Agreements
By SHERRI M. OKAMOTO, Staff Writer
An employee’s agreement not to compete with a former employer is invalid unless a statutory exception applies, the California Supreme Court unanimously ruled yesterday.
The court, however, divided on the issue of whether an agreement requiring an employee to terminate his noncompetition agreement and waive “any and all claims” against his former employer as a condition of employment with a new employer was void, with a majority upholding the agreement.
The court partially affirmed this district’s Court of Appeal decision voiding the noncompetition agreement executed by Raymond Edwards as a condition of his employment under Business and Professions Code Sec. 16600, and reversed the appellate court’s ruling regarding the claims waiver, concluding the agreement did not waive statutorily unwaivable protections under the Labor Code.
Arthur Andersen
Edwards worked for the Los Angeles office of accounting firm Arthur Andersen LLP. At the time he was hired, he was required to sign a noncompetition agreement which prohibited him from working for certain clients upon his termination.
After the government indicted Andersen in connection with an investigation into the Enron Corporation, Andersen sold Edwards’ accounting group to HSBC USA Inc.
HSBC extended an employment offer to Edwards, contingent on his execution of a “Termination of Non-compete Agreement.” The agreement required all former Andersen employees to release Anderson from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from” Andersen.
Edwards testified that he believed signing the form required him to give up his right to indemnification, which he felt was particularly important in light of the government’s investigation into Andersen and because he feared several Andersen clients would sue him and Andersen.
He refused to sign the termination agreement, and HSBC withdrew its employment offer. Andersen also terminated Edwards’ employment and withheld severance benefits.
He filed suit against HSBC and Andersen for intentional interference with prospective economic advantage and anticompetitive business practices, alleging in part that the noncompetition and termination agreements were both void as a matter of law.
Los Angeles Superior Court Judge Andria K. Richey, who has since retired, granted Andersen’s motion to sever trial on the issue of the enforceability of the agreements. She found in favor of Andersen on the merits, determining first that the noncompetition agreement was valid because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession, and second that requiring him to sign the termination agreement was not unlawful because it did not purport to waive his right to indemnification under the Labor Code.
This district’s Court of Appeal, Div. Three, disagreed. It held that the noncompetition agreement was invalid under Sec. 16600, which voids any contract that restrains an individual from in a lawful profession, trade, or business of any kind.
Violated Public Policy
The appellate court also concluded that the termination agreement purported to waive Edwards’s indemnification rights and was therefore in violation of public policy, which constituted an independently wrongful act for purposes of Edwards’ intentional interference with prospective economic advantage claim.
Writing for the Supreme Court, Justice Ming W. Chin explained that covenants not to compete are void under California law because Sec. 16600 evinces a settled legislative policy in favor of open competition and employee mobility.
Noting that the court has invalidated even narrowly tailored agreements as improper restraints under Sec. 16600, and that no California court had embraced the narrow-restraint exception recognized by the Ninth U.S. Circuit Court of Appeals, Chin concluded that under the plain text of Sec. 16600, an employer is forbidden from restraining a former employee from engaging in his profession unless the agreement falls within one of the exceptions set forth by Secs.16601, 16602 or 16602.5.
“Section 16600 is unambiguous,” he wrote and “if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad…[we] leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.”
As to the termination agreement, Chin explained that Labor Code Sec. 2802(a) provides for an employee’s right to indemnity for all expenditures or losses incurred by the employee in direct consequence of the discharge of his duties, and that Sec. 2804 voids any agreement to waive the protections of Sec. 2802 as against public policy.
Because the termination agreement did not expressly reference indemnity rights, Chin reasoned that under the tenets of contractual interpretation, it should not be read as encompassing such a waiver in order to render the contract lawful, valid and capable of being carried into effect.
Thus, he concluded, a contract provision releasing “any and all” claims generally does not encompass nonwaivable statutory protections, and does not implicitly apply to an employee’s right to indemnification from the employer because the contract will be treated as incorporating the law that the employee cannot waive that right.
However, Chin noted, even though the termination agreement was not per se unlawful, Edwards was not precluded from offering proof on remand of facts that might prove Andersen intended to have Edwards waive his Labor Code rights.
Chief Justice Ronald M. George and Justices Marvin R. Baxter, Carlos R. Moreno and Carol A. Corrigan joined Chin in his opinion, but Justice Joyce L. Kennard, joined by Justice Kathryn Mickle Werdegar dissented in part.
Even though the termination agreement did not use the words “indemnity claims,” Kennard argued it unambiguously required Edwards to release his indemnity rights under the Labor Code because it specifically required Edwards to release Andersen from “any and all…losses [or]…expenses…including…claims that…arise from…employment.”
She contended that the agreement expressly released the indemnity claims that the Labor Code protects, and therefore was sufficiently wrongful to support Edwards’ claim of intentional interference with prospective economic advantage.
Edwards was represented by Richard A. Love and Beth A. Shenfeld of the Law Offices of Richard A. Love, and Marc J. Poster and Robin Meadow of Greines, Martin, Stein & Richland.
Poster said that the “Supreme Court made it clear that there are no implied exceptions” to Sec. 16600, which “levels the playing field for employees” whose employers “insist on having the right to hire and fire employees at will…but then want to limit what the employee can do after he leaves.”
Although he acknowledged the “court didn’t agree with us that ‘any and all’ means any and all, they left it open in an individual case for there to be evidence that the employer intended to try to get the employee to waive a Labor Code right… so the door is still open for Mr. Edwards back in the trial court.”
Andersen was represented by Wayne S. Flick, Yury Kapgan, Kristine L. Wilkes, Colleen C. Smith, and Shireen M. Becker of Latham & Watkins, and Sharon A. McFadden, its in-house counsel.
Flick said his client was “disappointed” the Supreme Court had concluded there was “no wiggle room” for employers to use noncompetition agreements outside the legislative exceptions. “I don’t necessarily think that is the way the statute is worded and that was the legislative intent,” he said, “but we respect the court’s decision.”
However, Flick emphasized that the issue was a “relatively narrow piece of the case,” and said his client was “optimistic” about prevailing on a future trial on the merits of Edwards’ claims.
The case is Edwards v. Arthur Andersen LLP, 08 S.O.S. 4789.
Copyright 2008, Metropolitan News Company