It’s nothing new to learn that California does not hold non-compete agreements in high regard. Previously, some advocated the view that non-compete agreements were valid in California as long as any prohibitions on practicing one’s profession, business or trade are reasonable.
For example, while it might be reasonable to prohibit a former employee from soliciting work within a radius of fifty miles of the office for a one-year period, it’s probably not reasonable to prohibit a former employee from soliciting work anywhere in the United States for a five-year period. This “reasonableness threshold” is the law in many other states.
The California Supreme Court slammed the door on that view by confirming that non-competition agreements are invalid in California even if their prohibitions are narrow. The only exceptions are non-competition agreements in the sale or dissolution of a corporation, partnership, or limited liability companies
Background to Court’s Decision
The opinion comes from the case of Edwards vs. Arthur Andersen. Raymond Edwards worked as a certified public accountant in the Los Angeles office of the accounting firm Arthur Andersen LLP. Andersen required Edwards to sign a non-competition agreement which restricted Edwards from doing any of the following after leaving the firm:
- perform accounting services for eighteen months
- solicit clients from the Los Angeles office for eighteen months
- solicit any professional personnel from Arthur Andersen for eighteen months
In March 2002, the United States government indicted Arthur Andersen in connection with an investigation into Enron Corporation. In June, 2002, Arthur Andersen announced that it would cease its accounting practices in the United States and began selling off its business units.
Edwards’ group was sold to HSBC USA, Inc., a New York-based banking corporation. HSBC offered Edwards a job but taking the HSBC job required Edwards first to sign a release in which he would voluntarily resign from Arthur Andersen and release Arthur Andersen from any and all claims, including claims related to his employment by, association with, or compensation from Arthur Andersen.
When Edwards refused to sign the release, Arthur Andersen fired him and denied him severance payments and HSBC rescinded its job offer. Edwards’ refused to sign, in part, because he feared losing his right to indemnification from Arthur Andersen. Edwards wanted the indemnification in case there were any charges against him in connection with the government’s Enron investigation. Edwards also believed several of Andersen’s clients for whom he had done work might sue Andersen and name him as a defendant.
Edwards’ lawsuit against Arthur Andersen worked its way all the way up to the California Supreme Court which decided that Edwards' non-compete with Andersen – along with all other non-competition agreements in California – is invalid. You can read the entire Edwards v. Arthur Andersen decision online.
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