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BLG Law Note August 21, 2008

Greetings from BLG, In the process of revamping our website ( ), we are recommitting ourselves to alerting clients, colleagues and friends to changes in law that impact business. We hope you will find these occasional Law Notes useful.

California Supreme Court Counters Ninth Circuit: Employers Lose

The California Supreme Court held recently that even a "narrow restraint" on competition within a California noncompete agreement is prohibited under California Business and Professions Code Section 16600 (the statute generally prohibiting employee non-competition agreements), unless the prohibition falls within certain carefully delineated exceptions. See Edwards v. Arthur Andersen LLP, 08 C.D.O.S. 10256. The unanimous decision rejected a line of Ninth Circuit Court of Appeals authority which developed what had become known as the "narrow restraint" exception to Section 16600 in cases such as General Commercial Packaging v. TPS Package, 126 F.3d 1033 (9th Cir. 1997) and IBM v. Bajorek, 191 F.3d 1033 (9th Cir. 1999).

Under the Ninth Circuit's "narrow restraint" approach, the Court had permitted restrictions on competition where they were narrowly tailored. For instance, in IBM a provision pursuant to which departing employees would forfeit stock options if they competed with IBM within 6 months of departure was validated. Here, the Court reasoned, the restraint was permissible because it prevented employment in one small segment of the market. In General Commercial, the clause at issue prevented the departing employee from courting a specific client. Here, too, the Court held that this bargained for provision was permissible, as it did not completely preclude the employee from working for other clients and customers.

The California Supreme Court found this erosion of the language of Section 16600 contrary to legislative intent, affirming the Second District Court of Appeal's opinion that a non-competition agreement is only enforceable to the extent its restrictions are limited to 1) agreements necessary to protect trade secrets or prevent unfair competition, 2) restraining competition when it relates to the sale of a busines, 3) the dissolution of a partnership, or 4) the sale of stock in a corporation.

Before this ruling, only agreements that blocked all employment in a field were arguably invalid. Since employers can no longer rely on non-compete agreements to protect their business interests, it is important to ensure that strict policies and agreements are in place addressing the protection of trade secrets and prohibiting unfair competition. It is now clear that no matter how narrow the scope of restraint, a non-compete is void as against public policy to the extent that scope is beyond the limited exceptions. To the extent employers wish to push the envelope, they should keep in mind that in the wake of Edwards an employer cannot lawfully make signing an invalid agreement a condition of continued employment. Also, it is important to keep in mind that a termination for not signing such an agreement could open up the employer to litigation, and potential consequential and punitive damages.

If you would like more information on how this ruling affects a company's ability to protect its intangible assets, please contact us. We are continually looking at ways to better protect our clients' interests. Sincerely,

Robert Buchanan Buchanan Law Group

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