Court Confirms Broad Scope of California Ban on Non-Competes

January 13, 2009 by Beeson Tayer & Bodine

The California Supreme Court has issued a decision giving an extremely broad sweep to California’s ban on noncompete clauses. Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.

Edwards was subject to a noncompetition agreement that prohibited him from performing the same type of services for a client that he had performed at Andersen for a limited period after leaving the firm. When Andersen imploded, Edwards sued to void the noncompete agreement.

The Court reviewed the history of non-competes in California, emphasizing California’s deviation from the common law of non-competes. The common law has developed a “rule of reasonableness” in assessing the enforceability of non-competes, but the statute California passed on 1872 rejected the common law rule. That legislation is now codified in Business & Professions Code Section 16600.

“Today in California,” the Court flatly stated, “covenants not to compete are void, subject to several exceptions …”. Those narrow exceptions are limited to agreements in connection with the sale or dissolution of corporations, partnerships, and limited liability corporations.

Otherwise, non-compete agreements are void, even when narrowly tailored. And this means, the Court concluded, the “narrow restraint” exception to Section 16600 originally adopted by the Ninth Circuit in Campbell v. Stanford University (1987), is not consistent with California law.

In Campbell the federal court noted that some California courts excepted application of 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession.” But the Court rejected Campbell as a misreading of California law.

The California Supreme Court has the final word on the meaning of state law, so Campbell and other Ninth Circuit decisions that applied the narrow-restraint exception are no longer valid.

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