Employee Noncompetition Agreement Is Invalid Unless It Falls Within Statutory Exception; Contract Releasing Employer From “Any and All” Claims Is Valid, Because It Does Not Encompass Nonwaivable Statutory Protections.

View Westlaw version with hypertext link

In Edwards v. Arthur Andersen LLP (2008) 44 C.4th 937, 81 C.R.3d 282, 189 P.3d 285, plaintiff certified public accountant was hired as a tax manager by the Los Angeles office of defendant accounting firm. Defendant’s employment offer was contingent upon plaintiff signing a noncompetition agreement containing the following challenged clauses: (1) For 18 months after termination of employment, plaintiff was prohibited from performing professional services of the type he had provided while at defendant, for any client on whose account he had worked during 18 months prior to his termination. (2) For a year after termination, plaintiff was prohibited from “soliciting,” i.e., providing professional services to any client of defendant’s Los Angeles office. Five years later, HSBC purchased a portion of defendant’s tax practice, including plaintiff’s group, and made plaintiff an employment offer. In order to obtain defendant’s agreement to his resignation from defendant and his subsequent employment by HSBC, plaintiff was required to execute a Termination of Non-Compete Agreement (TONC) that released defendant from “any and all” claims arising from plaintiff’s employment with defendant.

Plaintiff refused to sign the TONC, and sued defendant for intentional interference with prospective economic advantage (see 5 Summary (10th), Torts, §741 et seq.) and for violation of the Cartwright Act, B. & P.C. 16720 et seq. (see 1 Summary (10th), Contracts, §591 et seq.). The trial court sustained defendant’s demurrer to the Cartwright Act claim and entered judgment for defendant on the interference claim, holding that (1) the noncompetition agreement was valid under B. & P.C. 16600 (see 1 Summary (10th), Contracts, §579 et seq.), and (2) the TONC did not purport to waive plaintiff’s rights to indemnification in violation of Lab.C. 2802 (3 Summary (10th), Agency and Employment, §121 et seq.). The Court of Appeal reversed. Held, judgment of the Court of Appeal affirmed in part and reversed in part; the noncompetition agreement was invalid, but the TONC was valid, because the release of “any and all” claims did not encompass nonwaivable statutory protections.

(a) Noncompetition agreement.

(1) California courts have consistently held that B. & P.C. 16600 evinces a settled policy in favor of open competition (see, e.g., D’sa v. Playhut (2000) 85 C.A.4th 927, 102 C.R. 495, 1 Summary (10th), Contracts, §581), and they have invalidated anticompetition agreements even if they were narrowly tailored (see, e.g., Muggill v. Reuben H. Donnelley Corp.(1965) 62 C.2d 239, 42 C.R. 107, 398 P.2d 147, 1 Summary (10th), Contracts, §581). (44 C.4th 945.)

(2) B. & P.C. 16600 invalidates contracts that restrain anyone from engaging in a lawful profession. Defendant argued that “restrain” should be interpreted to mean “prohibit,” so that only contracts that totally prohibited an employee from engaging in his or her profession would be illegal, while a mere limitation on an employee’s ability to practice his or her vocation would be permissible, as long as it was reasonably based. Defendant claimed that B. & P.C. 16600 was the statutory embodiment of prior common law that embraced the rule of reasonableness in evaluating competitive restraints. However, cases defendant cited to support a relaxation of the statutory rule simply recognized that the statutory exceptions to B. & P.C. 16600 reflected the same exceptions to the rule against noncompetition agreements that were implied in the common law (see, e.g., South Bay Radiology Med. Associates v. Asher (1990) 220 C.A.3d 1074, 269 C.R. 15, 1 Summary (10th), Contracts, §585). Thus, defendant’s contention is without merit, and the fact that the anticompetition agreement restricted plaintiff's ability to practice his profession was sufficient to invalidate the agreement. (44 C.4th 946.)

(3) Although some California courts have permitted restrictions where the former employee was barred from pursuing only a small or limited part of a business, trade, or profession, the cases relied on to create a "narrow restraint" exception are not in point. Thus, “[w]e 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.” (44 C.4th 948.)

(b) Contract provision releasing “any and all” claims.

(1) To the extent that defendant demanded that plaintiff execute the TONC as consideration for release of the invalid provisions of the noncompetition agreement, it could be considered a “wrongful” act for purposes of plaintiff’s claim of interference with prospective economic advantage. However, the TONC waiver itself was valid, because it did not encompass nonwaivable employee indemnity rights. (44 C.4th 950.)

(2). Lab.C. 2802(a) gives employees a right of indemnification from their employer for losses incurred on the job, and Lab.C. 2804 voids any agreement to waive the protections of Lab.C. 2802(a) Thus, indemnity rights are nonwaivable. Nevertheless, to support his contention that “any and all” encompassed his statutorily nonwaivable right to indemnification, plaintiff relied on Bardin v. Lockheed Aeronautical Systems Co. (1999) 70 C.A.4th 494, 82 C.R.2d 726, which also included the “any and all” language. However, plaintiff’s reliance was misplaced, because the rights in issue in Bardin were waivable. (44 C.4th 951.)

(3) Because the TONC expressly excluded two types of claims, but did not expressly reference or exempt indemnification rights, the Court of Appeal concluded that it was intended to apply to those rights. However, the TONC should be read as not encompassing a waiver of plaintiff’s indemnity rights, because that reading would be consistent with the tenets of contractual interpretation, i.e., it would make the contract lawful, valid, and capable of being carried into effect. (44 C.4th 953.)

(4) Finally, defendant contended that it did not except indemnity rights from the release because it was aware that, under Lab.C. 2804, those rights were statutorily nonwaivable, and that such an exception was thus legally unnecessary. California case law supports defendant’s contention. (44 C.4th 954.)

A concurring and dissenting opinion, in which one justice concurred, disagreed with the majority’s conclusion that the TONC was valid, stating that, although the TONC did not use the words “indemnity claims” and did not mention Lab.C. 2802, it unambiguously used language, i.e., “any and all … losses [or] … expenses … including …claims that … arise from … employment,” that required plaintiff to release the nonwaivable indemnity rights granted by Lab.C. 2802. (44 C.4th 956.)

Witkin References

On contracts not to compete generally, see 1 Summary (10th), Contracts, §579 et seq.

On covenants not to compete in employment contracts, see 1 Summary (10th), Contracts, §581 et seq.

On Lab.C. 2802, see 3 Summary (10th), Agency and Employment, §122

On interference with prospective economic advantage, see 5 Summary (10th), Torts, §741 et seq.