California Court Rejects Contrary Federal Case Law and Reiterates That Employer Non-Compete Agreements are Generally Unlawful in California

In Edwards v. Arthur Andersen LLP, 2006 WL 2498013 (August 30, 2006), the California Court of Appeal for the Second Appellate District expressly rejected somewhat settled Ninth Circuit case law that provides an exception to the general rule in California that covenants not to compete are unlawful. In evaluating a noncompetition agreement that prohibited an employee from performing services for certain former clients of the employer, the state court held that the agreement was invalid. Alone, this holding is unremarkable. However, in reaching this conclusion, the court applied California Business and Professions Code section 16600 literally, and expressly rejected the so-called “narrow restraint” doctrine the Ninth Circuit has developed as an exception to the general rule in California that covenants not to compete are unlawful. The narrow restraint exception essentially provides that a noncompetition agreement is not unlawful where it leaves a substantial portion of the market open to the employee. The California court directly stated that it views the Ninth Circuit’s narrow restraint doctrine as “a misapplication of California law when applied to an employee’s noncompetition agreement.”