California Reaffirms Rule Precluding Enforcement of Non-competes

In a long awaited, but unsurprising, decision, the California Supreme Court in Raymond Edward II v. Arthur Andersen LLP has rejected the use of most non-compete agreements. Arthur Andersen had argued that Section 16600 of the California Civil Code,  which generally voids any agreement limiting competition, only prohibited "broad agreements" that prevent a person from engaging entirely in his chosen business.  Agreements that did not have this broad effect, but merely regulated some aspect of post-employment conduct, were enforceable, according to Arthur Andersen. 

The California Supreme Court rejected this approach as it declined to adopt recent Ninth Circuit decisions that suggested that there was a "narrow restraint" exception that allowed companies to use non-competes if the agreements only restricted a small or limited part of their employees' future ability to work. 

The Raymond Edwards decision, however, left unresolved one major issue. In a footnote, the court expressly declined to address the applicability of the "so-called trade secret exception to section 16600". Accordingly, it may be possible for an employer in California to,  among other things, preclude a former employee from soliciting customers by claiming that its customer list is a trade secret. 

This decision may be important for Colorado employers with California employees and even for Colorado employees of a California employer. The enforceability of any non-compete may depend solely on which state's law is applied, which makes any choice-of-law provision and venue selection clause especially important when the two states have an interest in resolving the enforceability of any non-compete. Even with a choice of law provision, the conflict in the approaches taken by Colorado and California may spur a race to the courthouse. Either state's courts may decline to enforce a choice of law that bears on such an important public policy of the state.