Non-Compete Agreements in California
In the state of California non-compete agreements almost always are considered unenforceable. As early as 1872 California was enacting a public policy that restricts the use of non-competes. Such restrictions interfere with open and free competition. In 1872 the Civil Code was the ruling legislature; however current measures include the California Business & Professions Code 16600 (Section 16600).
Section 16600 states, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void”. Unlike other states California does not judge the reasonableness of a non-compete to determine its legality. Instead, the courts reject all non-competes that illegally restrict a person’s ability to work. As of 1941, when Section 16600 was passed, any type of document that restricts a worker’s right to free and lawful employment is not valid under California law. When interpreting this clause in California court cases, judges rule that non-competes violate these terms.
Non-Compete Agreements in California
Although under Section 16600 nearly every non-compete is invalid there are exceptions to the rule. In two specific cases, the state of California will allow for the execution of a non-compete agreement. The first is during the sale of a company’s goodwill. The goodwill of a company includes things like customer lists, patents, technology, and brand name. This type of non-compete allows for people to purchase businesses to feel assured that the former owners will not use any company goodwill to undercut them. Second is when a business partnership dissolves and the two parties agree not to compete against each other. In fact, sections 16601 and 16602 of Section 16600 legally support the use of non-competes in these situations.
Examples of Non-Compete Disputes
One example of Section 16600 being used in court is the case of Edwards v. Arthur Andersen, 44 Cal. 4th 937, 946 (2008). In 1997 Raymond Edwards II (Edwards) began working as a tax manager for Arthur Andersen LLP (Andersen). To work in the accounting firms Los Angeles office Edwards had to sign a non-compete agreement. The agreement was mainly concerned with the solicitation of clients and the poaching of employees. It included a clause restricting former employees from working for certain clients for a period of 12 months.
Edwards signed the agreement and worked at Andersen for five years. However, in 2002 the company was indicted on obstruction of justice charges by the United States governments. Anderson began to sell parts of its tax practices to HSBC USA, Inc. Edwards practice was sold, and he was offered aa job at HSBC. However, a condition of for employment was the required signing of a Termination of Non-compete Agreement (TONC). If he signed it Andersen would release Edwards from his original non-compete and he would begin work at HSBC. Edwards refused to sign as he felt certain conditions of the TONC violated his rights.
Due to his refusal to sign the TONC Anderson refused to release Edwards from his non-compete agreement. His employment at Andersen was terminated and his severance was withheld. In addition, HSBC withdrew its employment offer. In 2003, Edwards filed a complaint against Andersen, claiming that under Section 16600 his non-compete agreement was unlawful.
In 2006 the Court of Appeal of California ruled in Edwards favor. It agreed that Section 16600 made his, and nearly any non-compete agreement illegal. This ruling and reasoning were upheld by the California Supreme Court two years later in 2008.
Edwards v. Andersen helped to clarify California’s strong stance against non-competes. However, the case did not address how or if California would allow non-competes in the case of companies seeking to protect interest like trade secrets. Overall, California is an anti-non-compete state.
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