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	EMPLOYMENT LAW UPDATE: Edwards v. Arthur Andersen -- California Supreme Court Rules on Non-Competition Agreements and General Release of Claims Employment/Labor  By Blair Roberts The California Supreme Court issued its long-awaited decision in Edwards v. Arthur Andersen LLP, holding that non-competition agreements are invalid unless expressly permitted by statute. The Supreme Court also held that the phrase "any and all" claims in a general release does not encompass nonwaivable statutory claims, such as an employee's right to indemnity under Labor Code section 2802, and accordingly, use of that phrase in and of itself does not void a general release. Non-Compete Agreements Prior to 1872, under common law, California courts permitted reasonable contractual restraints on the practice of one�s profession, business or trade. In other words, non-compete agreements that were �reasonable� were valid. In 1872, however, when California enacted the Civil Code, the California legislature rejected the �reasonableness� standard governing non-compete agreements. The legislature enacted legislation voiding non-compete agreements, except in specific limited circumstances. That pronouncement of public policy is now embodied in Business and Professions Code section 16600, which 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. In general, the exceptions provided by the legislature all involved the sale of a business or the dissolution of interest in a business. There was no exception provided specifically addressing the average employee. Nonetheless, over 135 years later, non-compete agreements pertaining to employees have remained at the forefront of employment related litigation for a variety of reasons. The �Narrow Restraint� Exception One of the reasons for continued litigation over the enforceability of non-compete agreements has been a judicially created exception, the �narrow restraint� exception. In 1987, the Ninth Circuit had held that section 16600 only voided non-compete agreements that precluded one from engaging in their profession, trade or business. Essentially, the Ninth Circuit chose to interpret the legislature�s use of the term restrained in section 16600 to mean prohibited. Although certain federal court�s in the Ninth Circuit subsequently followed that reasoning and applied the judicially created �narrow restraint� exception, California courts had not. Instead, California courts had consistently held that section 16600 was a strong pronouncement of public policy, and that the only exceptions were those specifically provided for by statute. In Edwards v. Arthur Andersen LLP, the California Supreme Court has now had an opportunity to weigh in on the issue and has agreed with the California courts. The Supreme Court flatly rejected the Ninth Circuit�s judicially created �narrow restraint� exception, concluding that section 16600 prohibits employee non-competition agreements unless the agreement falls within a statutory exception. Edwards v. Arthur Andersen LLP The Edwards case was born out of the Enron scandal. Mr. Edwards had worked for Arthur Andersen since 1997. When he was hired, he was required to sign a non-compete agreement. In 2002, Arthur Andersen was indicted, and subsequently, when the company announced it would cease accounting practices in the United States, the portion of the company�s tax practice that Mr. Edwards worked for was sold to HSBC USA, Inc. HSBC offered employment to Mr. Edwards and other Arthur Andersen employees. The offer was conditioned on the employees executing a �Termination of Non-Compete Agreement� (TONC). Under the terms of the TONC, in exchange for being released from their non-compete agreements with Arthur Andersen so that they could work for HSBC, the employees would among other things, release Arthur Andersen from �any and all� claims arising from or related to their employment with the company. Mr. Edwards refused to sign the TONC. In turn, Arthur Andersen terminated his employment, and HSBC withdrew its offer of employment. Mr. Edwards sued both companies. The Supreme Court limited its review to two issues: the prohibition of employee non-compete agreements under Business and Professions Code section 16600 previously discussed, and whether a contract provision requiring an employee to release �any and all� claims is unlawful because it encompasses nonwaivable statutory claims. �Any and all� Language and Nonwaivable Statutory Claims One of the reasons Mr. Edwards refused to sign the TONC was that he believed that releasing Arthur Andersen from �any and all� claims would release the company from its obligation to indemnify him under Labor Code section 2802, which provides: An employer shall indemnify his or her employee for all necessary expenditures and losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful. Given the scandal, indictments and ceasing of operations, Mr. Edwards was justifiably concerned about potentially releasing Arthur Andersen from its statutory obligation to indemnify him, should he be dragged into the government�s investigation or named as a defendant in a suit brought by one of the clients he did work for. Once again emphasizing legislative declarations of public policy, the Supreme Court confirmed that the indemnity protections provided to employees under Labor Code section 2802 are nonwaivable under Labor Code section 2804, which provides: Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void, and this article shall not deprive any employee or his personal representative of any right or remedy to which he is entitled under the law of this State. The court concluded that �any and all� language in a release does not encompass nonwaivable statutory protections such as those contained in Labor Code section 2802, and that therefore releases containing that language would not necessarily be void under Labor Code section 2804. Impact of Edwards As discussed, non-compete agreements have remained the subject of employment related litigation. Non-compete language is often combined in employment documents with language addressing proprietary information and trade secrets, which could subject otherwise enforceable agreements to legal challenge. It is important that employers review their applicable documents carefully. Refusing to hire, retaliating against or terminating an employee who refuses to sign a document that arguably violates public policy will likely result in litigation and potential liability. Releases may also be challenged based on the inclusion of language that may encompass nonwaivable statutory protections. While the court held that use of the phrase �any and all� will not, in and of itself, invalidate a release, other language might. It is important to note that in the Edwards case, Justices Kennard and Werdegar dissented with the majority�s view regarding the specific language in the TONC that was at issue in the case. The dissenting Justices disagreed with the majority�s sole focus on the phrase �any and all,� and pointed specifically to other language contained in the release that they believed suggested an intentional effort on the part of Arthur Andersen to attempt to avoid its statutory obligation to indemnify its former employees. *********** If you would like to discuss how the issues discussed in this Alert might affect you or your business, please contact Blair Roberts at (949) 474-1880, x290 or the attorney with whom you regularly work. This Alert is published as a service to our clients and friends. It is intended for informational purposes only and is not intended to constitute advertising, solicitation or legal advice. �2008 Berger Kahn, A Law Corporation. All Rights Reserved. Back
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