California Court Strikes Down Noncompete Agreements

California law prohibits employee noncompete agreements unless the agreement involves the sale of a business, the California Supreme Court said Thursday, August 7.

The opinion in Edwards v. Arthur Andersen L.L.P. involved certified public accountant Raymond Edwards, who was employed by Arthur Andersen in its Los Angeles office. Edwards signed a noncompete agreement when he was hired in 1997, according to court papers.

After the Enron scandal, New York-based HSBC USA Inc. agreed to purchase Edwards’ practice group. As part of the purchase, employees in Edwards’ group were to resign from Andersen and would be offered a job at HSBC.

But they first needed to sign a “termination of noncompete agreement,” which was a general release of claims against Andersen. Edwards, who was concerned about potential liability in connection with Andersen’s marketing of disallowed tax shelters, refused to sign. Andersen then terminated him and HSBC withdrew its employment offer.

Edwards sued, claiming intentional interference with his prospective economic interests, among other things.

The court said in its decision, which partially overturned a lower court ruling, that “to the extent Andersen demanded Edwards execute the [termination of noncompete agreement] as consideration for release of the invalid provisions of the noncompetition agreement, it could be considered a wrongful act for purposes of his claim of interference with prospective economic advantage.”

Filed by Judy Greenwald of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.