EDWARDS II v. LLP

• Decision Date: 07 August 2008
• Docket Number: No. S147190.,S147190.
• Citation: 44 Cal.4th 937,81 Cal.Rptr.3d 282,189 P.3d 285
• Court: California Supreme Court
• Parties: Raymond EDWARDS II, Plaintiff and Appellant, v. ARTHUR ANDERSEN LLP, Defendant and Respondent.

44 Cal.4th 937

189 P.3d 285

81 Cal.Rptr.3d 282

Raymond EDWARDS II, Plaintiff and Appellant,

v.ARTHUR ANDERSEN LLP, Defendant and Respondent.

No. S147190.

Supreme Court of California

Aug. 7, 2008.

COPYRIGHT MATERIAL OMITTED.

Law Offices of Richard A. Love, Richard A. Love, Beth A. Shenfeld, Los Angeles; Greines, Martin, Stein & Richland, Marc J. Poster and Robin Meadow, Los Angeles, for Plaintiff and Appellant.

Kastner Banchero, Eric C. Kastner, Palo Alto, and Scott R. Raber as Amici Curiae on behalf of Plaintiff and Appellant.

Feldman Gale, James A. Gale, Miami, FL, Todd M. Malynn, Los Angeles, and Michael J. Weber, Palo Alto, for St Jude Medical, S.C., Inc., Pacesetter, Inc., and Advanced Bionics Corporation as Amici Curiae on behalf of Plaintiff and Appellant.

Law Offices of Jeffery K. Winikow and Jeffrey K. Winikow, Los Angeles, for California Employment Lawyers Association as Amicus Curiae on behalf of Plaintiff and Appellant.

Mark A. Lemley, San Francisco; Morrison & Foerster and James Pooley, Palo Alto, for Professors and Writers of Learned Treatises as Amicus Curiae on behalf of Plaintiff and Appellant.

Latham & Watkins, Wayne S. Flick, Yury Kapgan, Los Angeles, Kristine L. Wilkes, Colleen C. Smith, Shireen M. Becker, San Diego; and Sharon A. McFadden for Defendant and Respondent.

Paul, Hastings, Janofsky & Walker, Paul Grossman and Jennifer S. Baldocchi, Los Angeles, for California Employment Law Council and Activision, Inc., as Amici Curiae on behalf of Defendant and Respondent.

O'Melveny & Myers, Scott H. Dunham, Los Angeles, and Christopher W. Decker for Employers Group as Amicus Curiae on behalf of Defendant and Respondent.

CHIN, J.

We granted review to address the validity of noncompetition agreements in California and the permissible scope of employment release agreements. We limited our review to the following issues: (1) To what extent does Business and Professions Code section 16600 ¹ prohibit employee noncompetition agreements; and (2) is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

We conclude that section 16600 prohibits employee noncompetition agreements unless the agreement falls within a statutory exception, and that a contract provision whereby an employee releases “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802. We therefore affirm in part and reverse in part the Court of Appeal judgment.

FACTS

In January 1997, Raymond Edwards II (Edwards), a certified public accountant, was hired as a tax manager by the Los Angeles office of the accounting firm Arthur Andersen LLP (Andersen). Andersen's employment offer was made contingent upon Edwards's signing a noncompetition agreement, which prohibited him from working for or soliciting certain Andersen clients for limited periods following his termination. The agreement was required of all managers, and read in relevant part: “If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked 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 (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation. [¶] You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.” Edwards signed the agreement.

Between 1997 and 2002, Edwards continued to work for Andersen, moving into the firm's private client services practice group, where he handled income, gift, and estate tax planning for individuals and entities with large incomes and net worth. Over this period he was promoted to senior manager and was on track to become a partner. In March 2002, the United States government indicted Andersen in connection with the investigation into Enron Corporation, and in June 2002, Andersen announced that it would cease its accounting practices in the United States. In April 2002, Andersen began selling off its practice groups to various entities. In May 2002, Andersen internally announced that HSBC USA, Inc. (a New York-based banking corporation), through a new subsidiary, Wealth and Tax Advisory Services (WTAS), would purchase a portion of Andersen's tax practice, including Edwards's group.

In July 2002, HSBC offered Edwards employment. Before hiring any of Andersen's employees, HSBC required them to execute a “ Termination of Non-compete Agreement” (TONC) in order to obtain employment with HSBC. Among other things, the TONC required employees to, inter alia, (1) voluntarily resign from Andersen; (2) 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; (3) continue indefinitely to preserve confidential information and trade secrets except as otherwise required by a court or governmental agency; (4) refrain from disparaging Andersen or its related entities or partners; and (5) cooperate with Andersen in connection with any investigation of, or litigation against, Andersen. In exchange, Andersen would agree to accept Edwards's resignation, agree to Edwards's employment by HSBC, and release Edwards from the 1997 noncompetition agreement.

HSBC required that Andersen provide it with a completed TONC signed by every employee on the “Restricted Employees” list before the deal went through. At least one draft of the Restricted Employees list contained Edwards's name. Andersen would not release Edwards, or any other employee, from the noncompetition agreement unless that employee signed the TONC.

Edwards signed the HSBC offer letter, but he did not sign the TONC. ² In response, Andersen terminated Edwards's employment and withheld severance benefits. HSBC withdrew its offer of employment to Edwards.

PROCEDURAL HISTORY

On April 30, 2003, Edwards filed a complaint against Andersen, HSBC and WTAS for intentional interference with prospective economic advantage and anticompetitive business practices under the Cartwright Act (Bus. & Prof.Code, § 16720 et seq.). Edwards alleged that the Andersen noncompetition agreement violated section 16600, which states “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” He further alleged that the TONC's release of “any and all” claims violated Labor Code sections 2802 and 2804, which make an employee's right to indemnification from his or her employer nonwaivable.

Edwards settled with all parties except Andersen. The trial court sustained Andersen's demurrer to Edwards's Cartwright Act claim without leave to amend, concluding Edwards lacked standing to bring the action. It then denied Andersen's subsequent motion for summary adjudication on Edwards's intentional interference with prospective economic advantage cause of action, after concluding that triable issues of fact existed on the meaning of the agreements, and whether the agreements protected trade secrets. The court then granted Andersen's motion to sever trial on the issue of the enforceability of the noncompetition agreement and the TONC. (Code Civ. Proc. §§ 598, 1048, subd. (b).) The court dismissed all claims against Andersen, except for those relating to intentional interference with prospective economic advantage, which it concluded presented pure questions of law.

The trial court heard argument from both parties, but took no evidence. The court determined all issues of law in favor of Andersen on the merits, and entered judgment in its favor. The court specifically decided that (1) the noncompetition agreement did not violate section 16600 because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession; and (2) the TONC did not purport to waive Edwards's right to indemnification. Thus, requiring him to sign these documents was not unlawful. Edwards appealed the trial court's decision.

[1] [2] [3] At issue in the Court of Appeal was one of the elements required to prove a claim for intentional interference with prospective economic advantage. In order to prove a claim for intentional interference with prospective economic advantage, a plaintiff has the burden of proving five elements: (1) an economic relationship between plaintiff and a third party, with the probability of future economic benefit to the plaintiff; (2) defendant's knowledge of the relationship; (3) an intentional act by the defendant, designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the defendant's wrongful act, including an intentional act by the defendant that is designed to disrupt the relationship between the plaintiff and a third party. ( Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153-1154, 131 Cal.Rptr.2d 29, 63 P.3d 937.) The plaintiff must also prove that the interference was wrongful, independent of its interfering character. ( Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392-393, 45 Cal.Rptr.2d 436, 902 P.2d 740.) “[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” ( Korea Supply Co., supra, 29 Cal.4th at p. 1159, 131 Cal.Rptr.2d 29, 63 P.3d 937.)

At issue here is the third element of the tort. In the Court of...