Employee Noncompetition Agreements Are Invalid Unless They Fall Within Statutory Exceptions

In Edwards v. Arthur Anderson, LLP, (— Cal. Rptr.3d —, 2008 WL 3083156, Cal., Aug. 7, 2008) the California Supreme Court considered whether (1) Business and Professions Code section 16600 prohibits noncompetition agreements, and (2) a provision of a contract that requires an employee to release “any and all claims” is unlawful because it requires release of claims that include nonwaivable statutory protections.


When Raymond Edwards II (“Edwards”) accepted employment with Arthur Andersen LLP (“Andersen”) he was required to sign a noncompetition agreement. The agreement provides that, if Edwards leaves the firm, he can not perform for eighteen months the types of professional services he performed with the firm for any the firm’s clients. The agreement also prohibits Edwards from soliciting clients for eighteen months. The agreement does not prohibit him from accepting employment with a client.

Edwards worked for Andersen from 1997 until 2002, first as a tax manager and then as a senior manager. In March 2002, the United States indicted Andersen in connection with its investigation of the Enron Corporation. After the indictment, Andersen sold the tax group in which Edwards was employed to HSBC USA, Inc. HSBC offered Edwards employment, but required him to sign a “Termination of Non-compete Agreement” (“TONC”) which required Edwards to, among other things, voluntarily resign from Andersen and release Andersen from “any and all” claims including claims that arise out of or relate to his employment with Andersen. In exchange for signing the TONC, Andersen would agree to accept Edwards’ resignation and his employment with HSBC, and then release him from the noncompete agreement he signed when he came to work for Andersen. Edwards did not sign the TONC and Andersen terminated Edwards’ employment. HSBC subsequently withdrew its employment offer.

Edwards brought a lawsuit against Andersen and HSBC. HSBC settled the lawsuit with Edwards. Edwards alleged that Andersen intentionally interfered with prospective economic advantage. The trial court entered judgment in favor of Andersen. The Court of Appeal reversed the decision of the trial court in regard to Edwards’ claim of intentional interference with prospective economic advantage. Andersen sought review by the California Supreme Court.


In order to establish a claim for intentional interference with prospective economic advantage, Edwards is required to show that (1) he had an economic relationship with HSBC, (2) Andersen knew of that relationship, (3) Andersen intentionally disrupted Edwards’ relationship with HSBC, (4) the relationship between Edwards and HSBC was actually disrupted, and (5) Edwards suffered economic harm. At issue here is the third element, whether there was an intentional act by Andersen.

Edwards asserts that Andersen committed a wrongful act when it required him to sign the noncompetition agreement. Edwards alleges the noncompetition agreement is invalid under section Business and Professions Code section 16600.

Section 16600 provides, “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.” Exempted under that chapter are noncompetition agreements for the sale or dissolution of partnerships, corporations, and limited liability corporations. An employer cannot restrain an employee from engaging in his or her profession after employment ends unless the agreement falls within one of these three exceptions.

The Court concluded that the noncompetition agreement that Andersen required Edwards to sign is invalid. The agreement prohibited “Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession.” The Court held, “[t]o the extent that Andersen required Edwards to sign the TONC as consideration for the release of the invalid provisions of the noncompetition agreement, it could be considered a wrongful act for the purpose of his claim for interference with prospective economic advantage.”

The Court declined to recognize the “narrow-restraint” exception that has been adopted by the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit has held that section 16600 is not applicable where an employee is “barred from pursuing only a small or limited part of the business, trade or profession.” The Court found, “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restrains that were unreasonable or overbroad, it could have included language to that effect.”

The TONC released Andersen from “any and all” claims arising from or related to his employment with Andersen. Edwards claimed that this provision required him to waive his indemnity rights.

Labor Code section 2802 provides that an employer must indemnify its employee for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her 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.” Section 2804 provides that any agreement that waives the protections of section 2802 is void as against public policy. Edwards claims that language of the TONC which required him to release “any and all” claims against Andersen requires him to release Andersen from liability for indemnification even though section 2802 provides that his right to indemnification is nonwaivable.

The TONC did not expressly reference indemnity rights and the Supreme Court refused to read the TONC as encompassing a waiver of indemnity rights. The Court held “that a contract provision releasing ‘any and all’ claims, such as that used in the TONC in the present case, does not encompass nonwaivable statutory protections, such as the employee indemnity protection” of Labor Code section 2802. Therefore, the TONC does not violate section 2804, and is neither null and void nor unlawful.

The Court held that Andersen’s requirement that Edwards sign the TONC provision which required him to release “any and all” claims cannot form the basis for Edwards’ intentional interference with economic advantage claim because it was not an independently wrongful act. However, the Court remanded the matter so that Edwards could proceed on his intentional interference with economic advantage claim based on the fact that the noncompetition agreement was invalid.