California Supreme Court says noncompete agreements are illegal

August 8, 2008 | Anthony Ha | Comments |

California’s highest court has ruled unanimously that a common feature of employment contracts called a noncompete clause is illegal under state law and has been since 1872.

Basically, a noncompete says a company’s employees can’t work for or start a competing company, usually for a certain period of time. The rationale is that employees shouldn’t be able to take a company’s secrets and put them to use for someone else.

Apparently, the court’s decision, made yesterday, doesn’t just stop employers from including noncompete agreements in future contracts; it also applies to noncompetes signed in the past.

The ruling comes in a suit filed by tax manager Raymond Edwards II against former employer Arthur Andersen, an accounting firm. After Andersen shut down in 2002, Edwards tried to get a job with a subsidiary, but to do so he needed to be released from his noncompete agreement. Andersen would only agree to the release after Edwards signed away his right to bring future claims against the company; Edwards refused and filed suit. Now, the Supreme Court has ruled the noncompete was illegal.

This case is based on California law, so it doesn’t apply in the many other states that allow noncompete agreements. And since it’s a question of state law, this ruling is probably the final word.

One of the most prominent recent cases of a former employer suing a startup’s founding team was Iconix’s suit against former employees Lance Tokuda and Jia Shen, who created slide show site RockYou. In that case, which ended in a settlement, the allegations weren’t limited to a simple noncompete violation, but also included accusations of intellectual property theft.

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About the Author, Anthony Ha

Anthony is VentureBeat's assistant editor, as well as its reporter on enterprise technology, cloud computing, and tech policy. Before joining VentureBeat in 2008, Anthony worked at the Hollister Free Lance, where he won awards from the California Newspaper Publishers Association for breaking news coverage and writing. He attended Stanford University and now lives in San Francisco. Reach him at anthony@venturebeat.com. You can also follow Anthony on Twitter.

  • To be clear - the Supreme Court reaffirmed a long line of California decisions outlawing noncompete provisions.

    The challenge is that California is well outside the mainstream on this. In most other states noncompetes are taken for granted. Nation-wide businesses struggle to come up with noncompete terms that will hold up in California as well as the rest of the country.

    The Anderson case was in the latter category- a so called "narrow restraint" that Anderson hoped it could slip past the California courts. No such luck.

    California *does* allow employers to prevent former employees using the employer's confidential information in the service of a new company. That is likely what the Tokuda/Shen case was about.

    And last, please see (and support) Bijan Sabet's (bijansabet.com) campaign to get Massachusetts and other states to follow the California rule. As long as we don't steal company secrets we should be able to work for whomever we want.