Many employers attempt to protect their business by requiring their employees to agree to never compete to get a specified time as long as they leave the business. However, employee noncompetition agreements at the moment are invalid in California. Last week the California Supreme Court regarding Edwards vs. Arthur Anderson, LLP, reaffirmed and strengthened legislation. Employers might not hire around the condition that employees sign a noncompetition agreement with limited restrictions (i.e., no contact or solicitation of this company’s clients for the short time). The Court held by investing in only a couple of exceptions, noncompetition agreements are illegal in California. If an employer terminates employment because a member of staff refuses to sign a noncompetition agreement, the employer might be liable to the staff member for wrongful termination damages.
How The Law Changed – The California statute prohibiting employee noncompetition agreements is incredibly short. Section 16600 in the CALIFORNIA BUSINESS AND PROFESSIONS CODE reads: “Except as provided with this chapter, every contract during which anyone is restrained from participating in a lawful profession, trade, or business of any sort is to that extent void.” For some time employers have interpreted “restrained” in what the law states to mean “prohibited.” They have considered restricting employees for the limited length of time after leaving the business to comply with legal requirements. However, on August 7, 2008 the California Supreme Court rejected the limited restriction theory and held that limited restrictions restrain competition and therefore are illegal, closing the doorway tightly on employee noncompetition agreements in California.
When Noncompetition Agreements May Be Used – Noncompetition agreements will still be enforceable in partnerships then when a business ownership interest is offered. Also, companies can stay away from the use of their authentic trade secrets. What the California law prohibits is restraining competition.
The California Supreme Court Case – On August 7, 2008, the Supreme Court decided Edwards vs. Arthur Anderson. Raymond Edwards, an avowed public accountant, was hired by Arthur Anderson, LLP becoming a tax manager because of its Los Angeles office. The offer was contingent on Mr. Edwards signing a noncompetition agreement that prohibited him from doing work for or soliciting certain Andersen clients for limited periods following his termination. When Arthur Anderson was dismantled after its Enron related indictment, it sold the tax group managed by Mr. Edwards and used the production from its noncompetition agreement as leverage to have employee releases if they were hired because of the buyer in the tax group. Mr. Edwards wouldn’t sign the production and hasn’t been hired with the buyer. Edwards sued Arthur Anderson, claiming how the noncompetition agreement he signed was invalid to be a restraint on competition in violation of section 16600 in the BUSINESS AND PROFESSIONS CODE. The California Supreme Court held that except as given by statute, noncompetition agreements in employment agreements were invalid. Open competition and employee mobility were cited because legislative policy advanced by section 16600 on the BUSINESS AND PROFESSIONS CODE. The Court’s ruling is meant to support that policy in California.
Review Employment Contracts To Avoid Liability – If you have employees in California, your attorney should research your employment agreements and employee handbook to actually are in full compliance with the legal requirements.