Non-Compete or No Non-Compete? For Employees in California, There’s Not Much of a Question
In a recent decision, Edwards v. Arthur Andersen LLP, S147190 (Cal. August 7, 2008), the California Supreme Court held that employee non-compete agreements are not enforceable under California law, unless they fall within certain narrow statutory exceptions. The decision has a significant impact on employers’ current and future agreements, requiring review and related changes to ensure proper compliance.
Historically, California courts have highly scrutinized employee non-compete agreements. The basis for such scrutiny is Section 16600 of the California Business and Professions Code which voids contracts by which anyone is “restrained” from engaging in a lawful profession, trade or business. In Edwards, the Court broadened its interpretation of Section 16600, holding that the rule even prohibits “narrow-restraints” on competition (an exception which the Federal courts have held enforceable in the past). The Court, however, did provide that non-compete agreements in the following instances would be permissible under Section 16600: (i) in connection with the sale of a business, (ii) among partners in a partnership, or (iii) among members of a limited liability company. The Court also left open the possibility of an additional “trade secret exception,” which was neither at issue in the case nor expressly addressed.
In light of the Edwards decision, employers should review all current agreements (as well as form agreements) containing any post-employment competition restrictions. Although Edwards addresses a California statute, California courts may apply the holding to non-compete agreements entered into outside of the state in cases where the former employee later accepts employment in California. Therefore, agreements that contain any such provisions and do not fall into one of the exceptions noted above will not be enforceable in California. Employers should assess whether non-compete agreements should be amended or revoked and how to best relay any such changes to former or current employees.
SWA has the attorneys that can assist you in reviewing or amending your employment agreements, as well as other employment matters. Please let us know how we can help.
The information contained in this publication is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Craig Tzvi Gherman. The invitation to contact is not to be construed as a solicitation for legal work. Any new attorney/client relationship will be confirmed in writing.
Filed Under: Labor & Employment , Publications
