California Supreme Court says noncompete agreements are illegal

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.