California Supreme Court Holds Non-Competition Agreements Void

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The Supreme Court of California affirmed the State’s prohibition of noncompetition clauses in a decision issued August 7, 2008.

The plaintiff in the case was an accountant at Arthur Andersen who had signed a noncompetition agreement upon the start of his employment.  As Arthur Andersen unraveled in 2002, Edwards attempted to join HSBC.  A dispute over the terms of Edwards’s departure for HSBC led to litigation over the validity of his non-compete clause.

The common law, as developed in cases across the country, recognizes the validity of reasonable contractual non-compete clauses.  Under the relevant California statute, however, “Except 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.”  The statute expressly permits noncompetition agreements in the context of sale or dissolution of corporations, partnerships, and limited liability corporations.

Arthur Andersen argued that California also used a reasonableness standard when evaluating non-compete clauses.  The lower court agreed with Arthur Andersen.  The Supreme Court, however, reversed and found that Andersen’s noncompetition agreement was invalid because it restrained Edwards’s ability to practice his profession.  The cases Arthur Andersen relied on were either federal court cases or those addressing one of the explicit exemptions to the statue.  The Supreme Court pointed out that “no reported California state court decision has endorsed the [federal court’s] reasoning, and we are of the view that California courts ‘have been clear in their expression that [the statute] represents a strong public policy of the state which should not be diluted by judicial fiat.’”  The court went on to say, “We . . . leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under [the statute].”

Under this ruling, non-compete agreements are essentially void in California unless they fall in one of the narrow categories expressly provided for in the statute.   Therefore, parties should pay special attention to employment agreements in California and understand the significant limitations for non-compete clauses in that state.

Disclaimer: This Litigation and Dispute Resolution Law Alert is provided for informational purposes only and is not intended to serve as or provide legal advice relating to a particular matter. If you would like to discuss a litigation, arbitration or dispute matter please contact Jon P. Yormick, Managing Attorney, [email protected], Jason B. Desiderio, Associate,[email protected], or Nicholas A. Panagopoulos, II, Associate, [email protected], or call toll free 
(U.S. and Canada) at +1.866.967.6425.

 

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