California Supreme Court confirms that non-compete agreements are illegal when applied to employees

Loyal customers are the lifeblood of any business. As such, a business’s customer list may be its most valuable asset. Business owners need to ensure that their customers stay their customers. To do so, many businesses use non-compete agreements. While these agreements can provide very real benefits relating to the sale and purchase of a business, the California Supreme Court recently confirmed that such agreements are unlawful when applied to employees.

Business and Professions Code section 16600 is only thirty words long: “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.” Despite this simple, recent cases have battled for years in an effort to clarify the legal effect of non-compete agreements.

The key case in this arena is Edwards v. Arthur Andersen LLP. In this case, Raymond Edwards worked for Arthur Andersen as an accountant. The company sold part of its business, including the division where Edwards worked. Edwards had previously entered into a non-compete agreement which prohibited him from performing certain professional services for Arthur Andersen clients for 12 months and from soliciting Arthur Andersen personnel for 18 months.

The trial court held that the non-compete agreement was valid under the “narrow restraint” exception followed by some federal courts. This “narrow restraint” exception provides that a non-compete agreement does not violate Section 16600 if it imposes a limited restriction and “leaves a substantial portion of the market available to the employee.” The Court of Appeal disagreed, finding that the “narrow restraint” exception is invalid as applied to non-compete agreements.

The California Supreme Court agreed with the Court of Appeal and rejected the “narrow restraint” doctrine. The court reasoned that “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” (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 950).

Employers are now bound by the Edwards decision. This means that non-compete agreements are unenforceable unless they relate to the sale of a business. Employers should review personnel documentation to make sure that their employees are not subjected to unlawful non-compete agreements. Also, businesses must not attempt to enforce illegal agreements, even if an employee has previously agreed.

Next month’s article will discuss the topic of trade secrets, and the steps employers can take to ensure that their trade secrets are protected.