Edwards v. Arthur Andersen Llp

• Decision Date: 30 August 2006
• Docket Number: No. B178246.,B178246.
• Citation: 142 Cal.App.4th 603,47 Cal.Rptr.3d 788
• Court: California Court of Appeals Court of Appeals
• Parties: Raymond EDWARDS II, Plaintiff and Appellant, v. ARTHUR ANDERSEN LLP, Defendant and Respondent.

47 Cal.Rptr.3d 788

142 Cal.App.4th 603

Raymond EDWARDS II, Plaintiff and Appellant, v. ARTHUR ANDERSEN LLP, Defendant and Respondent.

No. B178246.

Court of Appeal, Second District, Division 3.

August 30, 2006.

Certified for Partial Publication^*

Law Offices of Richard A. Love, Richard A. Love and Beth A. Shenfeld, Los Angeles, for Plaintiff and Appellant.

Latham & Watkins LLP, Wayne S. Flick and Yury Kapgan, Los Angeles, for Defendant and Respondent.

ALDRICH, J.

INTRODUCTION

Plaintiff and appellant Raymond Edwards II (Edwards) was hired by Arthur Andersen LLP (Andersen) in 1997. At the time he was hired, Edwards was required by Andersen to execute a noncompetiton agreement, which prohibited him from working for or soliciting certain categories of Andersen clients for limited periods after his termination. Andersen eventually went out of business and sold its practice to various entities. Andersen's Los Angeles tax practice, of which Edwards was a part, was sold to HSBC, which hired Andersen's Los Angeles office personnel. As a condition of hire with HSBC, however, Andersen allegedly required that Edwards obtain a release of the 1997 noncompetition agreement. To do so, Edwards was required to execute a "Termination of Non-Compete Agreement" (TONC) drafted by Andersen. That document contained a broad release of claims against Andersen, as well as other terms favorable to Andersen. Edwards refused to sign and his employment offer with HSBC was withdrawn. He sued Andersen for, inter alia, intentional interference with prospective economic advantage and violation of the Cartwright Act. Andersen's demurrer to the Cartwright Act claim was sustained on the ground Edwards lacked standing to sue. The intentional interference claim was dismissed as a matter of law before trial, based upon the trial court's ruling that both the 1997 noncompetition agreement and the 2002 TONC were valid.

We conclude a noncompetition agreement between an employee and employer, prohibiting the employee from performing services for certain former clients, is invalid under Business and Professions Code section 16600¹ unless it falls within the statutory or "trade secret' exceptions to the statute. Such a noncompetition agreement is invalid even if the restraints imposed are narrow and leave a substantial portion of the market open to the employee. In so holding, we conclude the "narrow restraint" exception to section 16600, articulated by the Ninth Circuit, is not a proper application of California law. Because the 1997 noncompetition agreement was invalid and against public policy under section 16600, requiring Edwards to execute the TONC as consideration for release from the noncompetition agreement constituted an independently wrongful act for purposes of the elements of Edwards's intentional interference with prospective economic advantage claim.

We further hold that the TONC purported to waive Edwards's Labor Code section 2802 indemnity rights. Because Labor Code section 2802's indemnity provisions implement public policy, requiring Edwards to waive indemnity rights as a condition of continued employment violated public policy and constituted an independently wrongful act for purposes of the intentional interference with prospective economic advantage claim.

We reject Edwards's contention that a nondisparagement provision contained in the TONC violated Labor Code section 1102.5.

In the unpublished portion of the opinion, we reject Andersen's argument that, as a matter of law (1) Edwards lacked a prospective economic relationship with HSBC, and (2) HSBC, rather than Andersen, insisted that Edwards execute the TONC as a condition of employment. We further conclude Andersen's demurrer to Edwards's Cartwright Act cause of action was properly sustained.

FACTUAL AND PROCEDURAL BACKGROUND

1. Edwards's employment with Andersen and the noncompetition agreement.

In January 1997, Edwards, a certified public accountant, was hired as a Tax Manager by Andersen's Los Angeles office. In that position, Edwards provided income, gift, and estate planning services to high net worth individuals and their enterprises. Andersen was, at the time, one of the five major public accounting firms providing accounting services in California. As a condition of employment Edwards signed Andersen's standard noncompetition agreement, which was required of all Andersen managers. The relevant provisions of that agreement were as follows:

"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."

2. Sale of Andersen assets to HSBC, the TONC, and withdrawal of Edwards's employment offer with HSBC.

In March 2002, Andersen was indicted for obstruction of justice in connection with the investigation of Enron Corporation by the Securities and Exchange Commission. (See generally Arthur Andersen LLP v. United States (2005) 544 U.S. 696, 125 S.Ct. 2129, 161 L.Ed.2d 1008.) In June 2002, Andersen was found guilty.² In August 2002, Andersen announced it would cease practicing public accounting in the United States. Andersen's California accounting license was revoked in September 2002.

During this period, beginning in approximately April 2002, Andersen began selling portions of its practice to competitors. In May 2002, Andersen internally announced that HSBC, through a new subsidiary, Wealth and Tax Advisory Services (WTAS), would purchase a portion of Andersen's Los Angeles tax practice, including Edwards's group. As a condition of the HSBC transaction closing, Andersen required that all Andersen managers, including Edwards, execute the TONC in order to obtain employment with HSBC. The TONC was crafted by Andersen.

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" Andersen; (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 or affiliation with" HSBC, and release Edwards from the foregoing provisions of the 1997 noncompetition agreement.

HSBC extended an employment offer to Edwards. The offer was contingent upon Edwards executing the TONC. Edwards was informed by Andersen that he had to sign the TONC in order for him to be employed by HSBC. Edwards signed and returned HSBC's written employment offer, but refused to sign the TONC. As a result, Andersen terminated Edwards's employment and withheld severance benefits, and HSBC withdrew its employment offer.

3. Edwards's lawsuit and the trial court's rulings.

On April 30, 2003, Edwar is filed a complaint against Andersen, HSBC, and WTAS. The complaint alleged, inter alia, causes of action for intentional interference with prospective economic advantage and anticompetitive business practices under the Cartwright Act (§ 16700 et seq.).

The trial court sustained defendants' demurrers to the Cartwright Act claim without leave to amend on the ground Edwards lacked standing to bring the claim.

The trial court denied Andersen's subsequent motion for summary adjudication on Edwards's intentional interference with prospective economic advantage claim, concluding triable issues of fact existed regarding "the meaning of the agreements," and whether the noncompetition agreement protected trade secrets. All remaining claims against Andersen were dismissed via summary adjudication and are not at issue here. Edwards settled with the remaining defendants prior to trial.

Shortly before trial, Andersen moved pursuant to Code of Civil Procedure sections 598 and 1048, subdivision (b), to sever trial on the issue of the enforceability of the noncompetition agreement and the TONC.³ Andersen urged that the enforceability of the agreements presented pure questions of law for adjudication by the trial court, and contended that the provisions of both the TONC and the 1997 noncompetition agreement were lawful.

Over Edwards's objection the trial court granted the motion to sever and, at the same hearing, ruled in favor of Andersen on the merits. The trial court heard arguments from the parties, but did not take evidence. It determined, based primarily upon its interpretation of the contractual provisions, that as a matter of law (1) the noncompetition agreement fell within the "narrow restraint" exception to section 16600; (2) the noncompetition agreement provision prohibiting Edwards from soliciting Andersen employees was lawful; (3) the nondisparagement clause was not illegal; and (4) the TONC did not specifically release Edwards's indemnity rights. Accordingly, it granted judgment for Andersen. This appeal followed.

DISCUSSION

1. The intentional interference with prospective economic advantage claim.

a. Standard of review.

The parties agree that this court must independently review the trial court's ruling on the prospective economic advantage claim, in that it was decided as a matter of law and turned on analysis of...