Edwards v. Arthur Andersen — California Supreme Court Invalidates Limited Employee Noncompetition Agreements and Upholds General Release of Claims

August 13, 2008

On August 7, 2008, the California Supreme Court issued its long-awaited decision in Edwards v. Arthur Andersen LLP, holding that noncompetition agreements are invalid unless expressly permitted by statute, such as in connection with the sale of a business.  The Supreme Court also held that employee releases of “any and all" claims are valid even though nonwaivable statutory claims are not expressly carved out from the scope of the release.

Invalidity of Employee Noncompetition Agreements

Raymond Edwards II worked as a tax manager for Arthur Andersen LLP (“Andersen") in its Los Angeles office.  As a condition of employment, he was required to sign a noncompetition agreement prohibiting him from performing services for 18 months following employment termination for Andersen clients for whom he had performed work during the previous 18 months, from providing services to any client of the Los Angeles office for 12 months following termination, and from soliciting Andersen personnel for 18 months after termination. 

Following Andersen’s indictment in the wake of the Enron scandal, Andersen began selling practice groups to various entities, including HSBC USA ("HSBC").  As a condition for receiving severance from Andersen and being hired by HSBC, Edwards and his colleagues were required to sign a Termination of Noncompete Agreement ("TONC") prepared by Andersen.  Among other provisions, the TONC released Andersen from "any and all" claims.  Edwards refused to sign the TONC; in response, Andersen terminated his employment without payment of severance benefits, and HSBC withdrew its employment offer.

Edwards filed suit against Andersen and others claiming intentional interference with prospective business advantage and anti-competitive business practices under the California Business & Professions ("B&P") Code.

The trial court dismissed Edwards’ claim, determining that the contract provisions at issue fell within a "narrow restraint" exception to California B&P Code § 16600 previously recognized by the Ninth Circuit and applied by other state and federal courts in California.  Under the "narrow restraint" exception, a noncompetition agreement would not be found to violate Section 16600 if it involved a limited restriction and left "a substantial portion of the market available to the employee."  The California Court of Appeal reversed the trial court, finding the "narrow restraint" exception to be a misapplication of California law.  The California Supreme Court agreed, holding that no "narrow restraint" exception exists under California law.  According to the Court:  "Section 16600 is unambiguous, and if the Legislature intended for the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. . . . [W]e 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 Section 16600."  The Court concluded that Andersen’s noncompete agreement was invalid, since it restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore "restricted his ability to practice his accounting profession."  The Court also noted that an employer violates California public policy if it conditions employment on an employee’s signing of an unenforceable noncompetition agreement. 

Looking forward, both federal and state courts are bound to follow the Supreme Court’s interpretation of California law.  However, it should be noted that the Edwards decision does not affect the right of an employer to enforce noncompetition agreements in the context of the sale or dissolution of a business, partnership, or limited liability corporation, situations specifically excepted by statute from the broad scope of the ban on noncompetition agreements.  Nor does Edwards affect an employer’s right to protect its trade secrets.  Finally, because the Court did not reach the issue of the validity of the "no-raiding" clause prohibiting the solicitation of Anderson employees, those clauses presumably survive the Edwards holding.

Validity of General Releases

The second important issue addressed in Edwards is the validity of "release of claims" provisions.  Andersen required Edwards to release, among other things, "any and all" claims, including "claims that in any way arise from or out of, or are based upon or relate to [Edwards’s] employment by, association with or compensation from" Andersen.

The Supreme Court held that the release of "any and all" claims did not violate California Labor Code § 2802, which provides employees with indemnification rights which are nonwaivable under Labor Code § 2804.  Applying a common sense approach, the Supreme Court held that a general release does not need to include specific reference to non-waivable claims and that the traditional language releasing "any and all" claims is enforceable.  As for adding the phrase "except as otherwise prohibited by law" after "any and all" to release provisions, the Supreme Court stated:  "We fail to see what difference this would make.  The phrase ‘except as otherwise prohibited by law’ is vague and essentially informs the employee of nothing.  In addition, it appears most practitioners already operate with the understanding that the release does not encompass items ‘otherwise prohibited by law.’"  Thus, employers no longer need fear that general releases will be invalid if they fail to expressly carve out nonwaivable statutory claims.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s Labor and Employment Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following: 
Pamela Hemminger – Los Angeles (213-229-7274, [email protected])
William D. Claster – Orange County (949-451-3804, [email protected]
Christopher J. Martin – Palo Alto (650-849-5305, [email protected])
William J. Kilberg – Washington, DC (202-955-8573, [email protected])
Eugene Scalia
Practice Chair, Washington, DC (202-955-8206, [email protected])

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