JK CONSULTANTS QUARTERLY RECRUITING UPDATE
Post Employment Noncompetition Agreements – part 2
What is the Effect of the California Supreme Court’s Decision in Edwards v. Arthur Andersen
JK Consultants has considered the effects of this important decision as set forth below. The following is not an exhaustive list of considerations but is meant to create awareness.
The Supreme Court Held that Noncompetition Agreements Are Invalid in California Unless Authorized By A Statutory Exception. The Court confirmed that any “restraints” on lawful competition are unenforceable in California unless they qualify under one of the recognized statutory exceptions to section 16600; agreements in connection with the sale or dissolution of corporations (section 16601), partnerships (section 16602) or limited liability corporations (section 16602.5). The Court clearly stated that California courts will not consider the “reasonableness” of noncompetition agreements even if the restriction does not substantially prevent a person from earning a living in a chosen business.
The “Trade Secrets Exception. The future of the judicially created misappropriation of trade secrets information exception to section 16600 is uncertain since, in a footnote, the Court declined to address the applicability of the “so-called trade secret exception” since it was not in dispute in this case. However, JK Consultants believes that it is prudent to consult legal counsel to review trade secret policies and update them to help ensure that actual protected “trade secret” status for proprietary information remains intact.
Review Your Current Employment Documents. We also believe that it would be prudent for everyone to review all employment-related and proprietary information agreements to ensure that any noncompetition or nonsolicitation provisions are up to date in light of this new judicial holding. This would help to avoid claims resulting in unenforceability, unfair business practices and interference with contract or economic advantage.
National Employers. In many states, restraints on the practice of a trade or business, including noncompetition agreements, are valid if reasonable and geographically limited. In these states, employers have some ability to prevent former employees from engaging in certain forms of competition after the employment relationship has ended. Companies with operations outside of California who require employees outside of California to sign noncompetition agreements also face uncertain enforcement. There have been times when California courts have refused to apply out-of-state choice of law provisions. In addition, each state’s law governs the enforceability of noncompetition agreements differently or may not enforce the agreement. For example, an employee relocating for work to California or other jurisdiction that does not enforce the noncompete restrictions may race to the courthouse to be the first to file the lawsuit against the former employer.
In conclusion, JK Consultants believes that, in many respects, both employers and employees in California will benefit from the Edwards decision. The employee will have unrestrained employment mobility and ability to practice their profession. California employers will have their exposure to liability reduced for claims of unfair business practices, interference or inducement of breach of contract. In addition, noncompete agreements will lose their chilling affect in the hiring process.
JK Consultants has brought to your attention important information and but is not providing legal counsel. We urge you to contact your legal counsel and discuss this significant change in employment contracts.
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The JK Consultants Team
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