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Edwards v. Arthur Andersen, LLP


    Citation. Edwards v. Arthur Andersen LLP, 81 Cal. Rptr. 3d 282, 44 Cal. 4th 937, 189 P.3d 285, 2008 Cal. LEXIS 9618, 156 Lab. Cas. (CCH) P60,653, 2008-2 Trade Cas. (CCH) P76,299 (Cal. Aug. 7, 2008)

    Brief Fact Summary.

    Edwards (Plaintiff), a Certified Public Accountant who had been employed by Arthur Andersen, LLP (Defendant), argued that the noncompetition agreement he had signed when hired was invalid because, in violation of state statute, it restrained his ability to practice his accounting profession.

    Synopsis of Rule of Law.

    A noncompetition agreement, even if it is narrowly drawn so it does not completely prohibit a former employee from participating in his or her profession, trade, or business, violates a statute that prohibits the restraining of a former employee from practicing a profession, trade, or business, unless the agreement falls within an exception to the applicable statute.

    Facts.

    Edwards (Plaintiff), a CPA, was employed by Arthur Andersen, LLP (Andersen) (Defendant) as a tax manager, and had signed as a condition of his employment a noncompetition agreement that prohibited him, for an 18-month period, from performing the same type of professional services he had provided while at the firm, for any client on whose account he had worked during 18 months prior to his termination.  The agreement also prohibited Plaintiff from soliciting any client of the firm’s office where he worked for a year after termination.  When another firm bought Plaintiff’s division, as a condition of obtaining employment at the new firm, all employees were required to sign a termination of non-compete agreement (TONC) that Andersen (Defendant) demanded as consideration to release employees from the noncompetition agreement.  Plaintiff would not sign the TONC, and Defendant terminated his employment.  Plaintiff sued Defendant for intentional interference with prospective economic advantage and anticompetitive business practices, claiming, inter alia, that the noncompetition agreement was not valid according to state statute (California Bus. & Prof. Code, § 16600), which states “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  He argued it was invalid because it restrained his ability to practice his accounting profession.  The trial court, finding that the noncompetition agreement was narrowly tailored and did not deprive Plaintiff of his right to practice his profession, rendered judgment for Defendant.  The state’s intermediate appellate court reversed, and the state’s highest court granted review.

    Issue.

    Does a noncompetition agreement, even if it is narrowly drawn so it does not completely prohibit a former employee from participating in his or her profession, trade, or business, violate a statute that prohibits the restraining of a former employee from practicing a profession, trade, or business, unless the agreement falls within an exception to the applicable statute?

    Held.

    (Chin, J.)  Yes.  A noncompetition agreement, even if it is narrowly drawn so it does not completely prohibit a former employee from participating in his or her profession, trade, or business, violates a statute that prohibits the restraining of a former employee from practicing a profession, trade, or business, unless the agreement falls within an exception to the applicable statute.  The statute at issue rejects the common law “rule of reasonableness,” which provides that contractual restraints on the practice of a profession, business, or trade, are valid when reasonably imposed.  Instead, the statute evinces a settled legislative policy in favor of open competition and employee mobility.  Under the statute’s plain meaning, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule.  Anderson (Defendant) argues that the word “restrain” as used in the statute merely means “prohibit,” so that only contracts that totally prohibit an employee from engaging in his or her profession, trade, or business are illegal.  Under such an interpretation, mere limitation on an employee’s ability to practice his or her vocation would be permissible if reasonably based.  However, the cases cited by Defendant to support its position only recognize that the statutory exceptions to the statute reflect the same exceptions to the rule against noncompetition agreements that were implied in the common law.  Accordingly, the noncompetition at bar was invalid as it restrained his ability to practice his profession.  The federal court of appeals for this circuit has adopted a “narrow-restraint” approach to noncompetition agreements whereby application of the statute is excepted where one is barred from pursuing only a small or limited part of a business, trade, or profession.  The state’s courts, however, have not adopted such an exception.  The statute reflects a strong public policy of the state that should not be watered down by judicial fiat; if the legislature had intended the statute to apply only to unreasonable or over-broad restraints, it could have included language to indicate so.  Non-competition agreements are invalid under the statute, even if narrowly drawn, unless they fall within the applicable statutory exceptions.  Affirmed (as to this issue).

    Discussion.

    The California statute at issue in this case takes a minority approach to noncompetition agreements and is stricter than the approach taken in the majority of states, which will uphold a noncompetition agreement if it is “reasonable” as to its duration, geographical area, and type of employment or line of business.  Other states (e.g., New York) limit the enforcement of noncompetition agreements to situations where trade secrets are likely to be used or disclosed if an employee is allowed to compete.


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