The California Supreme Court has issued an important decision that makes it clear that employers cannot restrain an employee’s ability to compete, regardless of how reasonable or narrow the restrictions. As a result of this ruling, employers should do a thorough review of their employment agreements to ensure they do not contain unlawful noncompetition provisions.
Raymond Edwards II, a tax manager in Arthur Andersen LLP’s Los Angeles tax office, complained that a noncompetition agreement that barred him from working for or soliciting certain categories of Andersen clients for up to 18 months after his employment ended was illegal under California law. He also contended that Andersen illegally required him to sign a “Termination of Non-Compete Agreement” (TONC) when Andersen sold its L.A. tax practice and as a condition of going to work for the new owner.
The TONC released Edwards from the original noncompete agreement in exchange for a broad, general release of “any and all” claims. According to Edwards, the demand that he release claims against Andersen in exchange for being released from the illegal noncompete agreement violated public policy. He also argued that the TONC’s broad release of any and all claims was void because it was an implicit waiver of his nonwaivable rights under Labor Code section 2802 (requiring an employer to indemnify an employee for expenses incurred in the course of employment).
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The high court ruled that Calif. Business & Professions Code 16600 (the unfair competition law or UCL) flatly prohibits employee noncompetition agreements—including the one Edwards signed—unless the agreement falls within one of the limited exceptions outlined in the UCL statute (that is, except in connection with the sale or dissolution of corporations, partnerships, or limited liability companies). It is important to note that the Supreme Court’s decision did not disturb prior caselaw upholding noncompete pacts that are necessary to protect trade secrets.
On a better note for employers, the court upheld the broad, general release of claims. According to the Supreme Court, general language releasing any and all claims does not encompass nonwaivable statutory protections. The court said that the TONC didn’t reference Edwards’s section 2802 indemnity rights, so it wasn’t going to read into the release a waiver of those rights.