August 14, 2008Client Alert

Have You Analyzed The Choice-Of-Law Provision In Your Non-Compete Lately?

Protecting confidential information, trade secrets, and intellectual property from former employees and competitors can be critical to your business. Companies that operate in multiple states often struggle with the choice-of-law for their restrictive covenants. A recent decision by the California Supreme Court, Edwards v. Arthur Andersen LLP, __ Cal. 4th __, 2008 Cal. LEXIS 9618 (Cal. Aug. 7, 2008) (No. S147190), serves as a reminder to employers to draft employment agreements strategically to serve these goals. States vary widely in their approaches to non-competition agreements. Many states allow non-competition agreements, as long as they are reasonably limited and protect legitimate interests. With this recent decision, California continues to set itself apart, reinforcing prior California state court decisions that held invalid all non-competition agreements, with two minor exceptions for protection of trade secrets and sale of a business or partnership.

California Business and Professions Code §16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Prior to Edwards, a split of authority had developed on whether §16600 should be interpreted: 1) broadly, rendering any restraint on business or trade automatically unenforceable unless it falls within one of the recognized exceptions; or 2) narrowly, with a reasonableness standard to balance the interests. The conflict arose from a disagreement over whether the California Legislature, in adopting §16600, intended to codify the common-law rule, containing a reasonableness standard, or to reject it, eliminating the reasonableness standard. California state courts held the broad view, while California federal courts generally held the narrow view.

Resolving the split, the California Supreme Court in Edwards agreed with lower state courts and embraced the broad view, invalidating non-competition agreements that do not fall into the two statutory exceptions. The Court reaffirmed the state’s public policy generally condemning noncompetition agreements, noting that “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect."

It is worth emphasizing that Edwards does not invalidate non-competition agreements created to protect trade secrets. Employers in all states should take steps to ensure that such agreements protecting their confidential business information and trade secrets are valid. Moreover, in drafting future non-competition agreements, employers with multi-state operations should make strategic choice-of-law decisions, steering clear of California law when possible.

Michael Best’s Trade Secret Protection and Non-Competition Team frequently counsels employers with operations throughout the country regarding the drafting and enforceability of restrictive covenants and the protection of confidential information and trade secrets. For further information or counseling, please contact the author(s) of this alert.

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