No "Narrow Restraint" Exception - Noncompetition Clauses are Unenforcable

The California Supreme Court recently took the opportunity to reaffirm and solidify the rule in California that an employer cannot require an employee to enter into a noncompetition agreement. In Edwards v. Arthur Andersen, LLP (Decided August 7, 2008), the California Supreme Court also took this opportunity to rule out an exception that the Federal 9th Circuit had indicated it thought existed - the so called "narrow-restraint" exception.

This is a very employee friendly law. It is not the law in many other states. Nor is it a part of the common law that originally existed in California. Interesting conflicts of law issues arise when you have a company that may have a location in another state, but employs people in California.

The original common law rule was, and is in most states today, that noncompetition agreements are valid as long as they are reasonably imposed - the so called "rule of reasonableness."

California turned this common law on its head in what is now the Business and Professions Code Section 16600. This statute was originally enacted in 1872 as former Civil Code Section 1673. The statute 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 chapter goes on to exempt noncompetition agreements in the sale or dissolution of corporations, partnerships and limited liabilty companies. So, if an owner of a corporation, partnership or LLC agrees not to compete as part of the agreement to sell the business, the noncompetition agreement is not voided by this statute, even if the owner was also an employee.

Under this chapter, California courts have held that noncompetition agreements are void unless they fit the narrow exceptions of the statute - i.e. noncompetition in connection with the sale of a business.

In the Edwards v. Arthur Andersen, LLP case, Arthur Andersen argued that the word "restrained" as used in the statute really means "prohibit" and since the noncompetition agreement involved in this case did not totally prohibit the employee from engaging in his profession, trade or business - just prohibited doing so with former customers of Arthur Anderson, that it was a mere limitation on the employee's ability to practice his vocation and ought to be permissible.

Well, the California Supreme Court answered that argument with a resounding "No."

Because the noncompetition agreement prohibited the employee from perfoming professional services of the type he had provided while employed at Arthur Andersen for any client on whose account he had worked, and further prohibited him from providing professional services to any client of Arthur Andersen's Los Angeles office, it restricted his abililty to practice his profession and was an invalid and unenforceable agreement.

Now, the 9th Circuit had read into Section 16600 a so called "narrow-restraint" exception. Under that exception, if the noncompetition agreement does not entirely preclude the employee from pursuing his trade, profession or business, the agreement would be enforceable.

The California Supreme Court rejected this "narrow-restraint" exception, stating that "we are of the view that California courts 'have been clear in their expression that section 16600 represents a strong public policy of the state which shold not be diluted by judicial fiat ... We reject Andersen's contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600."