by Joel Wertman
12/08: Will California Decision Impact Non-Compete Agreements Across The Country? That's California Dreaming But Employers Must Still Be Cautious To Protect Their Interests
Employers in highly specialized and customer-driven fields have traditionally, and rightfully, been concerned with the prospect of losing existing customers to former employees who quit or are fired. From the employer's perspective, the former employee owes an ongoing duty of loyalty for at least some period of time after termination given that the former employee, in most circumstances, would have never met the client but for his former job. As a practical solution, some employers utilize non-competition agreements to prevent
solicitation of clients for up to two years in some instances. For many years non-competition contract language has been common not only for accountants but also for investment advisors, doctors, and countless other professionals.
Opponents to such provisions argue that non-competition agreements are restraints on free trade and the ability of the employee to practice his profession freely. As such, opponents of non-competition agreements are undoubtedly emboldened by the recent California state court decision of Raymond Edwards II v. Arthur Andersen, 44 Cal. 4th 937 (2008) which struck down a non-competition agreement signed by an accountant as a condition of employment with Arthur Andersen. Opponents of non-competition agreements will now likely argue that Edwards reflects important guiding precedent for all courts in considering the validity of non-competition agreements. Indeed, recent news articles highlight comments by attorneys who represent employees in such disputes touting Edwards as a landmark decision. However, attorneys who represent employers have optimism to argue successfully against the applicability of Edwards outside of California. In particular, it is important to note that the court's decision is narrowly tailored and dependant on California statutory law, which could limit its impact outside California.
The plaintiff, Raymond Edwards II ("Edwards"), is a certified public accountant who was hired by Arthur Andersen in January 1997. His employment was contingent upon signing a non-competition agreement. In particular, Edwards was prevented, for 18 months after release or resignation, from performing professional services of the type that he provided for any client for whom he worked during the 18 months prior to resignation. Moreover, the non-competition agreement set forth that Edwards could not solicit any clients, for a period of 12 months, to which he was assigned during the 18 months proceeding resignation.
Edwards worked for Arthur Andersen from 1997-2002 where he handled income, gift, and estate tax planning for individuals and entities with large incomes and net worth. After the indictment of Arthur Andersen in connection with the investigation of Enron in 2002, Arthur Andersen announced that it would cease its accounting practices in the United States. As such, Edwards' group was purchased by HSBC. Edwards was subsequently fired in 2002.
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On April 30, 2003, Edwards filed a Complaint against Arthur Andersen and HSBC. Among the claims of the Complaint was intentional interference with prospective economic advantage and anti-competitive business practices. To that end, Edwards alleged that the noncompetition agreement violated Section 16600 of the California Business and Professional Code which states, "Every contract by which anyone is restrained by engaging in a lawful profession, trade, or business of any kind is to that extent void." Accordingly, Edwards' challenge of the non-competition agreement was dependant upon application of California statutory law.
The court ultimately agreed with Edwards, holding that the non-competition agreement was invalid because, by restricting Edwards from performing work for Arthur Andersen's Los Angeles clients, Edwards was restricted from the ability to practice his profession. The court noted that the common law historically recognized that contractual restraints on the practice of a profession, business, or trade were considered valid if reasonably imposed. However, California rejected the common law "rule of reasonableness" when the Legislature enacted the civil code in 1872.
Arthur Andersen asked the court to adopt a limited "narrow-restraint" exception to Section 16600 that the 9th Circuit Court of Appealshad previously discussed in the matter of Campbell v. Trustees of Leland Stanford University, 817 F.2d 499 (9th Cir. 1987). Campbell acknowledged that California rejected the common law "rule of reasonableness" with respect to restraints upon the ability to pursue a profession but concluded that Section 16600 "only makes illegal those restraints which preclude one from engaging in a lawful profession, trade or business" and remanded the case to the District Court to allow the employee to prove that the non-competition agreement at issue completely restrained him from practicing his profession, trade, or business within the meaning of Section 16600.
Notwithstanding, Edwards neglected to adopt the reasoning of the federal court, noting that Section 16600 is unambiguous and "if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect." The Edwards rejection of non-competition agreements directly relies on supposed "unambiguous" provisions of the California statutory code. Therefore, this decision should be limited to application in California and offers minimal relevant legal precedent for
non-California litigants.
This is not to say that non-competition agreements are certain to be upheld, because that is clearly not the case. In our practice, we have certainly seen a measure of discomfort from courts in enforcing blanket provisions against competition. Nonetheless, employers have other protections which courts are much more likely to enforce in employment agreements. Most notably, Edwards did not address a "trade secret exception," which is also often utilized by employers as an additional mechanism to prevent former employees from soliciting its clients. Such provisions normally set forth that client lists and contact information are to be afforded protected trade secret status no different than the secret formula for Coca Cola. Certain state courts, including Pennsylvania, have held that customer lists, if not publicly available, are considered trade secrets. Practically speaking, trade secret provisions appear less onerous on the surface than non-competition agreements while largely accomplishing the same function of preventing former employees from soliciting clients.
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Joel Wertman, is an attorney at Marshall ,Dennehey, Warner, Coleman & Goggin. He maintains a general litigation practice with primary focus on disputes in the securities, insurance and real estate industries. Joel has represented clients in a wide range of litigation matters to include public customer disputes in state court, federal court and arbitration, as well as employment disputes seeking monetary and injunctive relief in both state and federal court
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