August 2008
Authors:
Jon Michaelson
650.798.6704 jon.michaelson@klgates.com
Thomas H. Petrides
310.552.5077 thomas.petrides@klgates.com
Linda L. Usoz
650.798.6702 linda.usoz@klgates.com
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In a much-anticipated decision issued on August 7, 2008, the California Supreme Court in Edwards v. Arthur Andersen LLP confirmed that post-employment restrictions on competition are void under California law unless the restriction falls within express statutory exceptions. In the same decision, the Court also ruled that an employment-related release that contains a release of “any and all” claims is valid because the broad language does not include the release of nonwaivable statutory protections, such as the employee’s right to indemnification under the Labor Code.
Edwards’ Suit
When employee Edwards was hired by Arthur Andersen (“Andersen”) in 1997, he signed an agreement that contained a number of restrictions on competition after he left Andersen.
Although the non-compete provision did not completely prohibit Edwards from working for a competitor, it did restrict Edwards for 18 months after he left from performing professional services of the type he provided for any client of Arthur Andersen on which he worked during the 18 months prior to leaving. It also prohibited Edwards for a period of 12 months from soliciting certain Arthur Andersen clients to which he was assigned.
In 2002, Andersen negotiated the sale of the portion of its business in which Edwards worked to HSBC USA (“HSBC”). As part of the sale, Edwards was offered employment with HSBC, contingent on his obtaining a release from the post-employment restrictions to which he had agreed with Andersen. That in turn required signing a document in which he would waive “any and all” claims against Andersen. Edwards believed that this condition would have required him to waive claims he might have for indemnity under
Labor Code section 2802 and he refused to sign the release. HSBC then withdrew its offer and Andersen terminated Edwards’ employment.
In his suit against Andersen, Edwards claimed, among other things, that the requirement that he agree to certain conditions in order to be released from the non-competition agreement was wrongful because the non-competition agreement was invalid and unenforceable on its face under California Business and Professions Code §16600, which provides that
“every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”
In its defense, Andersen argued that the non-competition restraints were narrow in scope and therefore valid and enforceable under the Ninth Circuit’s judicially-created “narrow restraint” interpretation of California’s statutory prohibition of non-compete agreements.
Under the narrow restraint doctrine, federal courts interpreting California law of noncompetition agreements had held that restrictions which are narrowly tailored to protect a legitimate business interest and which do not prohibit a former employee from practicing his/her profession, were enforceable under California law.

Andersen also asserted that the term “any and all claims” in its release did not encompass claims which could not be waived as a matter of law (such as claims for indemnity under Labor Code section 2802).
Non-Compete Restrictions
The California Supreme Court unequivocally rejected post-employment non-competition restrictions except those which fall within express, statutory exceptions.
Those exceptions are few and narrow but include, among others, the sale (including goodwill value) of the employee’s legitimate ownership interest in a business, and the dissolution or withdrawal of a partner from a partnership or member from a LLC. The Court, however, did not squarely address the applicability of the so-called “trade secret” exception to section 16600 or the issue of soliciting or recruiting employees of the former employer, because Edwards had not raised those issues with the Court.
The Supreme Court also went further to ensure there will be no confusion in the future regarding the federal judiciary’s “narrow restraint” doctrine. It expressly rejected the Ninth Circuit’s narrow restraint doctrine, explaining that it had been based on inapposite case law with no applicability in the employment context, on faulty reasoning, and on a failure to appreciate
California’s clear, long-standing (circa 1872) statutory prohibitions on post-employment agreements which restrain competition to any degree. No matter how narrowly tailored, according to the Court, if a restriction limits competition in any way and does not fall under a recognized exception, it cannot be enforced.
Release Language
Applying common sense to common practice in determining the second issue in the case, the California
Supreme Court held that it would not read the language
“any and all claims” to include claims that cannot be waived as a matter of law. The Court reasoned that under general contract principles, parties are presumed to know and to have the applicable law in mind when drafting contracts. Accordingly, agreements should be interpreted to give effect to the language while rendering them enforceable and in compliance with the law. In other words, per the California Supreme Court, the broad language of the Andersen release should not be read to encompass claims that as a matter of law cannot be waived.
Practical Application
The Edwards decision has broad application to all companies that employ personnel in California, or that seek to impose provisions in employment agreements in an effort to restrict post-termination competition in the State. The Supreme Court stated a straightforward rule: a post-employment non-competition agreement is invalid unless the restraint in the agreement is expressly permitted by California state law. Any other post-employment restriction is unlawful.
Accordingly, employers with California employees are strongly urged to be proactive in reviewing all current agreements with employees to ensure none contain provisions that seek to restrict post-employment competition contrary to California law. Based on the
Edwards decision and other recent California Court of Appeal decisions that have addressed these issues, the only restrictions which employers may safely continue to include in their agreements with California employees, and seek to enforce, are the following:
• Non-compete restrictions during employment
• Restrictions narrowly tailored and necessary to protect trade secrets and proprietary business information, such as prohibitions on the use or disclosure of confidential information
• Restrictions against employee raiding prior to termination of employment
• Restrictions following the employee’s sale of his or her entire ownership interest, including goodwill, in the company
• Restrictions following the dissolution of a partnership or LLC, or withdrawal of a partner or LLC member from such entity
Whether an employer is entitled to rely on any of the foregoing exceptions is determined on a case by case basis. Employers are urged to seek the advice of legal counsel before entering into any such agreements.
This advice is especially important because mere inclusion of language in any employment document which an employee must sign and which violates
California law may result in substantial liability, even if the employer’s intent is not to enforce the offending language. California Labor Code section
432.5 makes it unlawful to require the employee
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to sign an agreement containing an unlawful term, and Labor Code section 433 makes such inclusion a misdemeanor. Including unlawful or unenforceable non-compete provisions in a document an employee is required to sign has been held to be an unfair business practice under the Business and Professions Code and is also actionable under the California Labor Code
Private Attorneys General Act of 2004, rendering the offending employer liable for, among other things, attorneys fees and substantial penalties.
With regard to employment-related releases, this decision expressly approves the “any and all claims” phrase and there is now no reason not to include that phrase when obtaining a release from a departing employee.
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