Calif. High Court Bans Employee Noncompete Pacts

August 14, 2008

The California Supreme Court has upheld the state’s strict ban on most employee noncompetition agreements, ruling that companies cannot in any way limit a former employee’s ability to ply his trade.

The high court’s decision nullifies previous appeals court rulings that allowed companies to require workers to agree not to compete with their former employer as long as the restrictions were narrowly tailored.

The decision does not prevent employers from enforcing agreements to protect trade secrets, and should prompt California companies to take measures to protect themselves, intellectual property attorney lawyer Sean Lincoln said.

The Supreme Court left alone exceptions in state law that allow noncompete agreements in cases involving the dissolutions or sales of corporations, partnerships and limited liability corporations.

“In the years since its original enactment … our courts have consistently affirmed that (the law) evinces a settled legislatively policy in favor of open competition and employee mobility,” the court wrote in a split opinion.

Accountant Raymond Edwards II brought the case against his former employer, auditing firm Arthur Andersen, over a noncompete agreement that he said interfered with his ability to get a new job after the firm was indicted in 2002 in connection with a federal investigation into its client, Enron Corp.

Edwards also sued HSBC USA Inc, which bought his practice group but withdrew an employment offer after Edwards refused to sign a different contract that released him from the noncompete provisions but required him to cooperate with federal investigators and refrain from disparaging Andersen.

Andersen’s attorneys argued that previous appeals court rulings allowed the noncompete agreement because it was narrowly tailored and did not deprive Edwards of the right to pursue his profession.

The high court disagreed, saying it sided with state law in “generally” condemning noncompetition agreements.

“The noncompetition agreement that Edwards was required to sign before commencing employment with Andersen was … invalid because it restrained his ability to practice his profession,” the court wrote.

Attorney James Pooley and David Murphy, who specialize in trade secrets and unfair business practices, said the decision “was correct as a matter of law and public policy.”

(Reporting by Gina Keating, editing by Richard Chang)

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