labor lawAdivision of labor law center

Nationwide employers should note that both federal and state courts in California will now throw out almost all noncompetition agreements. California has one of the most restrictive laws regarding noncompetition agreements. In fact, such agreements are almost always unenforceable in the state.

 

California law specifically requires that every individual shall retain the right to pursue any lawful employment opportunity.

 

Recently, Edwards v. Arthur Andersen upheld that principle. A tax manager for Arthur Anderson LLP in Los Angeles, Raymond Edwards signed a noncompete agreement in 1997.

 

The agreement specifically noted that  Edwards would not work directly for any of his Arthur Anderson clients, for 18 months after his separation from Arthur Anderson.

 

After the Enron debacle, Arthur Anderson closed its Los Angeles office and laid Edwards off. Another company offered Edwards a job, but only if he was released from the Arthur Anderson noncompetition agreement. Edwards and Anderson were unable to reach an agreement, and the other firm withdrew its job offer.

 

Initially, according to SHRM, the Society for Human Resource Management, the California courts ruled against Edwards, because the agreement was for a limited time and covered a limited scope. However, both the California Appeals Court and the California Supreme Court ruled in Edward’s favor. They noted that the federal “narrow restraint exception” did not apply under California law.

 

Companies that do business nationwide should consider having a separate noncompete agreement for California, or none at all.

 

Across much of the country, noncompetition agreements are tested by a “rule of reason”. When a noncompetition agreement is for a short period, limited to a certain geographic area and limits the prohibited activities, it is generally lawful. For example, a non-compete clause that prohibited a car salesman from ever selling cars again, would be unenforceable. The courts would rule that it set too severe limits on the employees ability to earn a living, and support his or her family.

 

However, an agreement that the employee, once terminated, would not be permitted to work in a sales capacity for another new car dealership within 20 miles, for 3 months, would probably be enforceable.

 

Noncompete agreements are very common in the entertainment industry. The courts have generally upheld noncompetition agreements where the employee is paid at least 50% of his or her salary, for the life of the agreement.

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