The State Of Recruiting


Post Employment Noncompetition Agreements – part 1

The State Of Recruiting
The State Of Recruiting

Based upon our years of being in the recruiting industry and encountering post-employment noncompetition agreements on a regular basis, JK Consultants believes that the recent California Supreme Court case Edwards v Arthur Andersen is so important that we bring it to your attention in our quarterly recruiting update.

JK Consultants is not a law firm and we do not provide legal advise to our clients and candidates.  The analysis below is our own opinion based upon what we encounter in our recruiting experience.  We encourage you to seek advice from your legal counsel.

On August 7, 2008, the California Supreme Court issued Edwards v Arthur Andersen in which it held that Andersen’s noncompetition agreement was invalid under California Business & Professions Code Section 16600 since it restrained Edwards’ ability to practice his profession.  The Court rejected the application of the Ninth Circuit’s narrow restraint exception where one is barred from pursuing only a small or limited part of the business, trade or profession. The Court held that “noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they fall within the applicable statutory exceptions.”  As discussed more fully below, we believe this case will have substantial effects in California.

Edwards’ employment offer with Arthur Andersen LLP (Andersen) was contingent upon him signing a noncompetition agreement that included the following clause:

“If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation.  This does not prohibit you from accepting employment with a client. For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation.  You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.”

California has a long-standing public policy prohibiting restraints on trade.  In Edwards, the California Supreme Court stated that, in California, covenants not to compete are void subject to several exceptions.  California Business & Professions Code Section 16600 states “except as provided in this Chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  The California Legislature has created statutory exceptions that validate contracts restraining competition in connection with the sale or dissolution of corporations (section 16601), partnerships (section 16602) or limited liability corporations (section 16602.5).  California courts have consistently affirmed that Section 16600 clearly states a settled legislative policy in favor of open competition and employee mobility unless they are necessary to protect the employer’s trade secrets.  In Edwards, the Court noted that if the Legislature intended the statute to apply to restraints that were unreasonable or overbroad, it could have included language to that effect but it did not.

The Court of Appeal in Edwards noted that noncompetition agreements raised public policy concerns because they encouraged employers to push the boundaries of the “narrowness” requirement and, at the same time, burdened employees with having to guess whether a particular noncompetition restriction was valid. The Court of Appeal explained that a prospective future employer would be reluctant to hire an employee who had signed a questionable noncompetition agreement for fear of defending a lawsuit.

JK Consultants has brought to your attention important information but is not provide legal counsel.  We urge you to contact your legal counsel and discuss this significant change in employment contracts.

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