Non-competition agreements are tough to enforce in California.

Let’s take a quick look at a major case that deals with non-competition agreements in the employment area.

CPA Ray Edwards (Edwards), a tax manager, was hired by a Los Angeles accounting firm – Arthur Andersen LLP (Andersen) in 1997. Edwards had to sign a noncompetition agreement that prohibited him from working for or seeking Anderson clients for limited periods upon his termination.

The agreement Edwards signed stated: If you leave the Firm, for eighteen months after release or resignation, you agree not to perform the professional services you provided clients you worked with during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client.

For twelve months after you leave the Firm, you agree not to solicit any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation.

Edwards worked for Andersen for six years and was promoted to senior manager with an eye to becoming a partner. The United States government indicted Andersen in connection with Enron Corporation.

In May 2002 Andersen internally announced that HSBC USA, Inc. would purchase a portion of Andersen’s tax practice, including Edwards’s group. HSBC offered Edwards a job. Before hiring, all Andersen employees were required to execute a “Termination of Non-Compete Agreement” (TONC)
The TONC required employees to (among other things): release Andersen from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from” defendant and continue indefinitely to preserve confidential information and trade secrets except as otherwise required by a court or governmental agency, etc.

In exchange, Andersen agreed to accept Edwards’s resignation, agreed to Edwards’s employment by HSBC, and released Edwards from the 1997 noncompetition agreement.

HSBC demanded Andersen provide a completed TONC signed by every employee before the deal went through. Andersen would not release Edwards, or any other employee, from the noncompetition agreement unless they signed the TONC.

Edwards signed the HSBC offer letter, but he did not sign the TONC. Andersen terminated Edwards’s employment and withheld severance benefits. HSBC withdrew its job offer. Edwards refused to sign the TONC because he didn’t want to give up his right to indemnification. He felt some of Andersen’s clients may sue them and name him as a defendant.

When all was said and done the California Supreme court decided that Andersen’s noncompetition agreement was invalid because the agreement restricted Edwards from working for Andersen’s Los Angeles clients after his separation from Anderson, and therefore restricted his ability to practice accounting – his profession. This violated express California law.
Said the court: An employer “cannot lawfully make the signing of an employment agreement, which contains an unenforceable covenant not to compete, a condition of continued employment. [A]n employer’s termination of an employee who refuses to sign such an agreement constitutes a wrongful termination in violation of public policy.”

Put another way, the agreement Andersen made Edwards sign in 1997 was invalid because it didn’t allow him to practice his profession for a period of time once he left his employment with Andersen. The court added that under the circumstances of this case, what was illegal was restraints that precluded one from engaging in a lawful profession, trade or business. Indeed, California courts are clear in their expression that section 16600 of the Business & Professional Code demonstrates a strong public policy of the state which “should not be diluted by judicial fiat.”

In reference to Edwards not signing the TONC because he didn’t wish to waive his right to indemnity, the bottom line was that the Labor Code says that right can’t be waived.

To say that this case was a landmark decision would be a major understatement, and even today it is still being discussed for the ramifications it has on non-competition agreements in a whole host of contexts beyond just employer-employee relationships. The court seemed to make clear that section 16600 expresses a legislative decision to invalidate non-competition agreements to be entered into by a seller of a business so long as its limiting scope is reasonable.

If you find yourself facing a situation where you are required to sign or want to get someone to sign a non-competition agreement, speak to a knowledgeable business attorney first before you sign or ask for anything. The Court in Edwards seemed to suggest that asking for a non-competition agreement beyond what you are entitled to do may expose you to liability. So don’t take a chance or you may wind up not being able to compete after the person from whom you wrongfully extracted that non-compete gets a big judgment against you. At least that’s what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

Non disclosure agreements are essential to keep the lid on confidential information you don’t want shared with others.

Non-disclosure agreements (NDAs) ideally are the most potent when the parties who are contemplating a potential business relationship agree in advance to keep each other’s confidential information confidential. Not doing this right up front may end up with the other party telling others your secrets, using them for their own economic benefit, and exposing valuable intellectual property rights for use by anyone.

John, the innovative entrepreneur noted for his unique approach to doing business in a way that made him a roaring success, decided to partner on his newest venture with an employee he thought had the moxy to become successful. John was almost paranoid about locking sensitive files in the safe every night and taking the time to encrypt all his e-files. He didn’t give much thought to the information he shared daily with his protégé.

John didn’t mention a NDA when he first proposed his business idea to his employee, Tyler. In fact, he didn’t really think he’d need one. After all, they chatted daily and he felt Tyler was an upstanding young man.
John’s business idea of launching an online MLM that taught people how to get out of debt and make money at the same time had real potential in today’s dire economy. Tyler appeared to share his enthusiasm about the launch and how to set up the business.

John was understandably shocked when he discovered a few months later that there was a new site on the Internet that offered to teach people the tools to get out of debt and then recruited them into the business of selling the ‘get out of debt information’ to others. He called his business attorney, Arnold, to find out what he could do about this distressing state of affairs when he found out Tyler was behind the new website.

Arnold regretfully informed John that it was typically recommended that a NDA be entered prior to doing any negotiations, interviews or anything else that related to a proposed new venture where confidential information or material is shared. The fact that the cat was out of the bag was unfortunate, but there was not much anyone could do about that in the absence of a NDA.
Typically, a non-disclosure agreement clearly spells out conditions between party A and B, specifically dealing with sharing and using confidential information and materials. It usually makes reference to the parties keeping highly sensitive information confidential, details solutions for violating the agreement, and suggests arbitration for disputes over violations if necessary.

Sadly, in John’s case the NDA would have been essential to keep his brainchild MLM idea protected and it should have been put into place prior to any discussions taking place or material changing hands.
There are many examples in which a NDA is considered a critical tool. One instance involves software or other network solutions or the sharing of intellectual property (such as John’s online MLM idea.) In many instances the NDA is specific to the business being contemplated – tailored to cover each different case. So borrowing someone’s NDA won’t cut it, as it might not be enforceable later.

Generally speaking the vast majority of NDAs contain information about who the parties are, various clauses that may need to be incorporated, and most importantly, what information should be kept confidential. If either party violates the agreement, legal action can be taken. Having said that though, the whole idea of having a NDA in the first place, is to avoid litigation.

If you’re about to set up business with another person, call a business attorney and discuss the value of drafting a non-disclosure agreement. It will save you a lot of grief later. As for John, he had to kibosh his idea and move on to opening a business towing wrecks rather than make money online, while his former employee became rather wealthy from John’s original idea. If John had taken precautions up front to get a NDA in place, these roles might have been reversed….at least that is what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.