Edwards v. Arthur Andersen LLP

Supreme Court of California · 2008 · Contracts

ContractsNoncompetition agreementsEmployment release agreementssection 16600noncompeterestraint of tradeemployee mobilityopen competition

Facts

Arthur Andersen hired Edwards as a tax manager only after he signed a noncompetition agreement barring him for limited periods after departure from performing professional services for certain Andersen clients and soliciting clients of Andersen's office. When HSBC sought to hire Edwards as part of its purchase of part of Andersen's tax practice, Andersen would release Edwards from the noncompetition agreement only if he signed a Termination of Non-compete Agreement (TONC). The TONC required, among other things, that Edwards resign and release Andersen from "any and all" claims arising from his employment. Edwards refused to sign the TONC, Andersen terminated him and withheld severance benefits, and HSBC withdrew its job offer.

Issue

Does Business and Professions Code section 16600 invalidate an employee noncompetition agreement that restricts a former employee's ability to serve certain clients, even if the restraint is narrow? Does a release requiring an employee to waive "any and all" claims unlawfully waive nonwaivable statutory indemnity rights under Labor Code sections 2802 and 2804?

Rule

Under Business and Professions Code section 16600, every contract restraining anyone from engaging in a lawful profession, trade, or business is void to that extent unless it falls within a statutory exception in sections 16601, 16602, or 16602.5; California does not recognize a judicial narrow-restraint exception for reasonable or limited employee noncompetition agreements. A contract provision releasing "any and all" claims does not, by that general language alone, encompass nonwaivable statutory protections such as an employee's indemnity rights under Labor Code section 2802, because contracts are interpreted, where possible, to be lawful and to incorporate existing law.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Park worked as a software implementation consultant for Redwood Harbor Systems, a fictional firm in San Diego, California. Her employment contract states that for 12 months after leaving, she may not provide implementation services to any customer she served during her last year with the firm; no sale-of-business, partnership-dissolution, or LLC-dissolution arrangement is involved.

If Redwood Harbor sues to enforce the clause, how should a California court rule?

Explanation. Section 16600 voids every contract restraining anyone from engaging in a lawful profession, trade, or business unless a statutory exception applies. The majority rejected a judicial narrow-restraint or reasonableness exception for employee noncompetition agreements. A customer-specific restriction on performing the same services still restrains professional practice and is void absent a statutory exception.