With the economy down, many well-known employers in virtually every industry across the country have increased their efforts to protect their customer relationships, market share, and confidential business information by bringing no-compete and/or trade secret misappropriation litigation against former employees and competitors. These lawsuits have included:
- Bear Stearns suing a former executive director who joined a competitor in Massachusetts;
- Motorola suing a former executive in Illinois who joined Apple;
- Clear Channel suing a former vice president who joined The Tribune Co. in Illinois;
- Wachovia suing Banc of America and three former Wachovia employees in Virginia;
- Countrywide suing an ex-manager in Oklahoma;
- Merrill Lynch suing a former financial advisor in Florida;
- American Express Bank suing Credit Suisse in Florida (over alleged trade secret misappropriation);
- National Oilwell Varco, L.P. (NOV) suing a rival oil field supply company and four former employees in Texas; and
- IBM suing a former director of sales and current Hewlett Packard employee in California (claiming trade secret theft).
The California Supreme Court, however, has just made it very clear that no-compete restrictions in employment agreements – including even narrowly tailored no-solicitation of customer restrictions – are not enforceable in California.
In Raymond Edwards, II v. Arthur Anderson, LLP, Arthur Anderson sought to enforce the following no-solicitation restrictions contained in an employment contract with a former tax manager and CPA:
- an 18-month prohibition on servicing clients whom the employee serviced at any time during the 18-month period before his termination from employment; and
- a 12-month prohibition on soliciting accounting services from any client of the Arthur Anderson office where he was assigned.
Citing to and discussing the plain language of California Business Code Section 16600, the California Supreme Court squarely held that the two contractual restrictions above were not enforceable under California’s Section 16600. The Court discussed at length how California has rejected the common law “rule of reasonableness” concerning the enforcement of restrictive provisions in employment agreements that are designed to deter fair competition. The Court also made it clear that it was not embracing the federal Ninth Circuit’s evolving “narrow-restraint” exception to Section 16600, which Arthur Anderson urged the Court to adopt with respect to the “no-solicitation of client” restrictions before the Court. As the Court held, “Section 16600 is unambiguous, and if the legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.”
Thus, California will not enforce no-compete nor even no-solicitation of customer restraints in an employment agreement. As such, California remains a “safe haven” for its residents to simply disregard no-compete or no-solicit restrictions in an employment agreement. Left open is whether California courts will enforce no-compete and no-solicit restrictions in employment agreements containing choice of law provisions applying laws from other states (some lower California courts have declined to honor these provisions), or enforce no-compete or no-solicit restrictions in employment agreements that are entered into in other states but which an out-of-state employer seeks to enforce against a former employee who is now residing in California.