California
Partner Departure Law

July 15, 2013

According to the California Supreme Court in Edwards v. Arthur Andersen, There is No “Narrow Restraint” Exception to General Rule Voiding Noncompetition Agreements

As a general rule under California law, contracts that restrict or penalize competition among former employees and employers are void and unenforceable under Business & Professions Code Section 16600.  In Edwards v. Arthur Andersen, the California Supreme Court examined the issue of whether or not there was a “narrow restraint” exception to this general rule, which would allow a contractual provision to be valid and enforceable when a party is “barred from pursuing only a small or limited part of the business, trade or profession.”  The California Supreme Court held that there was no such exception to the unambiguous and undiluted language of Section 16600 and that any such restraints on an employee’s right to pursue his/her trade or business are invalid and unenforceable.  (See Edwards v. Arthur Andersen (2008) 44 Cal.4th 937.)

Raymond Edwards was a certified accountant hired as a tax manager in the Los Angeles Office of Arthur Andersen LLP (“Andersen”).  When HSBC USA, Inc. purchased a portion of Arthur Andersen’s tax practice, Andersen required employees to sign a termination of non-compete agreement (“TONC”), among other things, as condition of their hire with the new company.  Edwards refused to sign the agreement and as a result was terminated by Andersen.  Edwards subsequently brought a claim against his former employer for intentional interference with prospective economic advantage (“IIPEA”), among other claims.  The viability of the IIPEA claim was heard by the trial court as purely a question of law that hinged on the validity of the TONC agreement.  On the issue of the TONC, the trial court found that the agreement did not violate Section 16600 because it was narrowly tailored and did not completely deprive Edwards of his right to pursue his profession.  Edwards appealed the trial court’s decision.

The Court of Appeal reversed and held, in part, that the TONC was invalid and unenforceable under Section 16600. In reviewing the TONC, the Court noted, “The first challenged clause prohibited Edwards, for an 18–month period, from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination. The second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The Court of Appeal determined that the agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession. (Edwards v. Andersen, supra at 948, citing Thompson v. Impaxx (2003) 113 Cal.App.4th 1425, 1429.)  The Court of Appeal therefore held that “the non-competition agreement that Edwards was required to sign before commencing employment with Andersen was invalid because it restrained his ability to practice his profession.” (See Edwards at 948.)

Andersen argued that a limited or narrow restraint on an employee’s right to practice did not violate Section 16600, and that the TONC was valid because Edwards was only barred from pursing a small or limited part of his trade or practice, and was not entirely restricted in his ability to practice his profession.  The California Supreme Court rejected this argument and affirmed the Court of Appeal’s decision on that issue.  The Court stated that, “we are of the view that California courts ‘have been clear in their expression that Section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.’”  (Edwards, supra, at 949, citing Scott v. Snelling (N.D. Cal.1990) 732 F.Supp. 1034, 1042.) The Court further opined that, “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.”  (Edwards, supra, at 950.)

As discussed earlier, such restrictions contained in partnership agreements in anticipation of dissolution or partner departure are excluded from this rule by Section 16602 when they are reasonable in duration and impose only limited geographical restrictions.  However, even non-compete agreements between partners can be void and unenforceable if they impose unreasonable restrictions on a partners right to practice law.  Thus, prior to considering departing from an existing partnership, a partner needs to give careful consideration and analysis to any non-compete agreements or contractual restrictions on his/her right to practice law imposed by the existing partnership agreement.