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In a ruling long-awaited by the employment law sector, the state Supreme Court on Thursday effectively rejected the use of most non-competition agreements in California. The unanimous court held that in Edwards v. Arthur Andersen, 08 C.D.O.S. 10256, “Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule.” The ruling creates a new “bright line” for employers, said Richard Frank, chair of Cooley Godward Kronish’s international employment practice, who was not involved in the case. “All agreements that don’t fit into one of the statutory exemptions are by virtue of this decision void,” Frank said. With its decision in Edwards, the court rejected recent Ninth Circuit findings that California’s Business and Professions Code §16600 contained a “narrow restraint” exception that allowed companies to use non-compete agreements so long as the pacts only restricted “a small or limited part” of their employees’ future ability to work. In Edwards, accounting firm Arthur Andersen argued that the “narrow restraint” exception condoned the company’s non-competition agreement, which tax manager Raymond Edwards II signed in 1997. Five years later, banking corporation HSBC offered Edwards a job on the condition that he and Arthur Andersen terminate his non-compete contract. Edwards refused to sign the termination agreement, citing a requirement that he give up all future claims against the accounting firm, which had recently been indicted in connection with its work at troubled Enron Corp. Arthur Andersen then fired Edwards, and HSBC rescinded its job offer. Edwards sued both companies for interfering with his career. “Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception,” Chin wrote. “We reject Andersen’s contention that we should adopt a narrow-restraint exception to §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 §16600.” The Supreme Court largely upheld a 2006 ruling by the Second District Court of Appeal that sided with Edwards. “This is not a surprising opinion. I think this is what most practitioners in California expected,” said Jennifer Redmond, a partner with Sheppard, Mullin, Richter & Hampton, who was not involved in the case. “We’ve reaffirmed the concept of employee mobility in California, and employers really need to ensure that their employment agreements are consistent with this decision.” The decision, several attorneys said, could place new emphasis on California’s Uniform Trade Secrets Act, a statute that gives employers the right to protect certain company information, including, in some narrow circumstances, client lists. The Supreme Court, in a footnote in Thursday’s ruling, declined to address a trade-secret exception to §16600. “What this decision does not do is eliminate the possibility of former employers saying to employees, ‘You cannot solicit our customers because our customers are trade secrets,’” Redmond said.

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