California Supreme Court rejects use of most non-competition agreements

Last week, in Edwards v. Arthur Andersen, a unanimous California Supreme Court held that the state legislature has restricted the ability of employers to prevent employees from working for a competitor.   As a result of the ruling, noncompetition agreements that do not fit into one of the California's statutory exemptions are void.

Edwards rejects a recent 9th Circuit finding that California's Business and Professions Code section 16600 contained a "narrow restraint" exception allowing companies to use noncompete agreements so long as the pacts restrict only "a small or limited part" of their employees' future ability to work.  In rejecting the "narrow restraint" exception, the state supreme court noted that it is up to the legislature either to relax the statutory restrictions or to adopt additional exceptions to the prohibition-against-restraint rule under §16600.

California employers may still be able to prevent former employees from soliciting customers because California's Uniform Trade Secrets Act gives employers the right to protect certain company information, including, in some narrow circumstances, client lists.  However, Edwards generally reaffirms the principle of employee mobility in California.

Edwards also discusses the permissible breadth of employee release agreements, holding that agreements in which employees release "any and all" claims do not waive statutory protections such as the employee indemnity protection of Labor Code section 2802.  Accordingly, California employers should review their employment agreements to ensure they accomplish what is intended and are consistent with this decision.

Edwards affirms a 2006 Court of Appeal ruling; see our report on that opinion here.