The case of David Donatelli is a good reminder to employers how important choice of law provisions can be in noncompetition agreements. The Trade Secrets and Noncompete Blog recently chronicled a fight between EMC Corp (based in Massachusetts) and Hewlett Packard Co. (based in California) over the enforceability of a noncompetition agreement with a former high level EMC employee.
California courts have clearly established that noncompetition agreements are very difficult to enforce under California law, as explained further below. Therefore, once Donatelli left employment with EMC, the company raced to file a lawsuit against the former employee to prevent him from working with HP in Massachusetts. HP also raced to file a lawsuit in California barring EMC from enforcing the noncompetition agreement.
The Massachusetts court ruled first, finding that the agreement was enforceable under Massachusetts law, and that California law does cannot affect the court’s ruling. The court allowed Donatelli to present evidence establishing that his duties and job at HP did not directly compete with his former position at EMC. The court allowed Donatelli to work for HP in California given the fact that he proved there is minimal overlap between his new HP position and his former position at EMC.
Noncompetition Agreements In California
In California, noncompetition agreements are governed by Business & Professions Code section 16600, which states: “Except 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.” The statute permits noncompetition agreements in the context of sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).
Under the common law, as still recognized by many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.
In 2008, the California Supreme Court ruled on the enforceability of noncompetition agreements under California in Edwards v. Arthur Andersen LLP. Arthur Andersen argued that California courts have held that section 16600 embrace the rule of reasonableness in evaluating competitive restraints.
The Court disagreed with Arthur Andersen, and noted:
We conclude that Andersen’s noncompetition agreement was invalid. As the Court of Appeal observed, “The first challenged clause prohibited Edwards, for an 18-month period, from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination. The second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession.
The Court found that this agreement was invalid because it restrained Edwards’ ability to practice his profession.
However, Arthur Andersen argued that section 16600 has a “narrow-restraint” exception and that its agreement with Edwards survives under this exception. Andersen pointed out that a federal court in International Business Machines Corp. v. Bajorek (9th Cir. 1999) upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. Andersen also noted that a Ninth Circuit federal court in General Commercial Packaging v. TPS Package (9th Cir. 1997) held that a contractual provision barring one party from courting a specific customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude” the party from pursuing its trade or business.
In refusing to accept the “narrow-restraint” exception for noncompetition agreements in California, the Court stated:
Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” [citation] 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. We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.
The Court’s ruling basically eliminated the validity of non-competition agreements under California that are not expressly provided for in Section 16600.