by Jonathan A. Massimino, Associate

Contractual restriction on employee mobility and competition has always been a controversial subject with an uncertain standing in the law.  The debate represents an intersection between an individual’s right to contract and the general public policy against restrictive provisions in the context of employment.  Many businesses, through an express agreement such as an employment or severance agreement, or through the acknowledgement signed by an employee upon receipt of the company’s employee handbook, include a provision that the employee may not engage in competitive acts against their former employer upon the termination of the employment relationship.  These so-called noncompetition clauses usually last for a period of one year or longer, and can also include other restrictions, such as those that confine the effect of the non-competition clause to a certain geographical area or industry.

Such provisions have come under attack for being too restrictive on employee mobility. Opponents to non-competition clauses argue that it is improper to force restrictions on an individual from practicing his or her chosen trade or profession in adhesive employment contracts.  Proponents of these restrictions describe the legitimate business need of ensuring that former employees do not take the knowledge and experience gained during their employment to then compete against their former employers.  Asking a court to enforce these restrictions is a risky proposition, as conflicting case law in both California and Federal districts have often confused the issues. Recently, however, the California Supreme Court issued its opinion on the matter, which seems to finally have made clear California’s position on non-competition clauses.

The California Supreme Court took up this issue in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.  Raymond Edwards, a certified public accountant, was hired by Arthur Andersen (“Andersen”) in January 1997. Edwards’ offer of employment was contingent on his signature on a non-competition agreement, which prohibited him from working for or soliciting Andersen clients for eighteen months after his employment with Andersen ended.  Edwards signed the agreement, and worked for Andersen for five years, during which time he became a partner with the firm. In 2002, however, Andersen collapsed in connection with the Enron scandal, and Edwards’ practice group was purchased by HSBC USA, Inc.

HSBC offered to continue Edwards’ employment, but only if he agreed to voluntarily resign from Andersen, release any claims he may have had against the firm, and continue to preserve Andersen’s trade secrets and confidential information.  Edwards refused, and filed a complaint against Andersen and HSBC, alleging that the non-competition agreement he signed with Andersen violated California Business & Professions Code Section 16600, which voids every contract that restricts an individual from engaging in a lawful profession.  The trial court sided with Andersen, finding that the non-competition agreement was narrowly tailored, and did not totally deprive Edwards of his right to pursue his chosen profession.  Edwards appealed the decision and was successful, at which point Andersen requested review by the California Supreme Court.

The Court began its opinion with an in-depth analysis of the history and meaning of Section 16600.  The Court noted that California first articulated the state’s public policy in favor or open competition and employee mobility in the year 1872, and that covenants not to compete were void with limited exceptions, specifically, in those situations where the sale or dissolution of a business is involved.  Andersen took the position that while broad non-competition provisions do violate Section 16600, narrowly tailored covenants do not, and that the Federal Ninth Circuit endorsed this view in its interpretation of California law, adopting a “reasonableness” approach to the issue.

The California Supreme Court took on this conception directly, noting that it had invalidated such provisions in the past when they required the employee to give up too much, such as pension rights.  The Court went on to state that no California state court had ever endorsed the Ninth Circuit’s “reasonableness” approach, and that it would not be the first to do so.  The Court reverted to upheld the blanket rule that “an employer cannot by contract restrain a former employee from engaging in his or her profession.” Edwards, 44 Cal.4th at 948.  In doing so, the Court found that the non-competition agreement originally signed by Edwards was invalid because it restricted his ability to practice his accounting profession.

Importantly, however, the Court kept in tact the so-called trade secret exception to Section 16600, which provides that an employee may not use the trade secrets and/or confidential proprietary information of his or her former employer to compete against that business. Such behavior still constitutes unfair competition, in violation of California Business & Professions Code Section 17200, et seq.  As such, the Court’s opinion in Edwards does not give employees free reign to compete against former employers using whatever methods they see fit.  Rather, unfair competition laws remain in place as a baseline protection to California businesses.

The Edwards opinion, effectively puts a stop to the trend of narrow non-competition provisions, and also answers any questions as to whether such restrictions would be enforced by a California court.  As a practical matter, the Court’s decision represents a double-edged sword for California contractors.  The Court clearly restated California’s public policy in favor of employee mobility.  Accordingly, as long as unfair competition laws are observed, there should be an increase in key talent moving from one business to another, as any lingering doubts about the enforceability of non-competition clauses have been answered. On the other hand, it is now more difficult to restrict such mobility, making it more problematic to retain key employees via contractual restriction.

The practical issue that still hangs over employee movement is the use and protection of trade secrets and/or confidential proprietary information as employees move to industry competitors.  Even though an employee is free to depart, that employee is still barred from using the confidential information of his or her former employer to compete against that employer.  As such, businesses would be wise to take steps to protect their confidential information.  Such steps could include the insertion of confidentiality provisions in any employee agreements used by the employer, and also to taking adequate measures to define and protect any information deemed to be confidential, distinctive, and critical to the continued success of the enterprise.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.
 
Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.