Amicus Brief Celc & Activision Inc Supporting Arthur Andersen

Case No. S147190 IN THE SUPREME COURT OF THE STATE OF CALIFORNIA

RAYMOND EDWARDS II, Plaintiff and Appellant, v.

ARTHUR ANDERSEN LLP, Defendant and Respondent.

APPLICATION FOR LEAVE TO FILE AMICI CURIAE BRIEF AND PROPOSED AMICI CURIAE BRIEF IN SUPPORT OF DEFENDANT, RESPONDENT, AND PETITIONER ARTHUR ANDERSEN LLP

After a Decision by the Court of Appeal, Second Appellate District, Division Three Case No. BI78246 Los Angeles Superior Court Case No. BC 255796 Honorable Andria K. Richey, Judge

PAUL, HASTINGS, JANOFSKY & WALKER LLP Paul Grossman (State Bar No. 35959) Jennifer S. Baldocchi (State Bar No. 168945) 515 South Flower Street, 25th Floor Los Angeles, California 90071 Attorneys for Amici Curiae CALIFORNIA EMPLOYMENT LAW COUNCIL and ACTIVISION, INC.

APPLICATION FOR LEAVE TO FILE AMICI CURIAE BRIEF

Pursuant to Rule 8.520 of the California Rules of Court, Activision, Inc. ("Activision") and the California Employment Law Council ("CELC") respectfully request permission to appear as amici curiae in this proceeding and to file the attached proposed brief in support of Petitioner Arthur Andersen LLP ("Andersen"). IDENTIFICATION OF AMICI

The CELC is a voluntary, nonprofit organization that promotes the common interests of employers and the general public in fostering the development in California of reasonable, equitable, and progressive rules of employment law. CELC's membership includes approximately 50 privatesector employers in the State of California, who collectively employ well in excess of a half-million Californians and include representatives from many different sectors of the nation's economy (aerospace, automotive, banking, technology, construction, energy, manufacturing, telecommunications, and others). Activision is a leading international publisher of interactive entertainment software products. Activision is headquartered in California. CELC has been granted leave to participate as amicus curiae in many of California's leading employment cases, such as: Foley v. Interactive Data Corp., 47 Cal. 3d 654 (1988); Cassista v. Community Foods, Inc., 5 Cal. 4th 1050 (1993); Turner v. Anheuser-Busch, Inc., 7 Cal.

4th 1238 (1994); Cotran v. Rollins Hudig HallInt '1, Inc., 17 CaL 4th 93 (1998); White v. Ultramar, Inc., 21 Cal. 4th 563 (1999); Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000); Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000); Richards v.

1

CH2M Hill, Inc., 26 Cal. 4th 798 (2001); and Asmus v. Pacific Bell, 23 Cal.

4th 1 (2000). CELC and Activision have a significant interest in the outcome of this case. The Court of Appeal's bright-line rule prohibiting restrictive covenants is unreasonable, inconsistent with settled precedent, and will negatively impact employer investment in employee development, client relationships and the protection of confidential, proprietary information. The decision threatens to invalidate countless contracts in which the parties relied upon the narrow restraint doctrine, which is based on long-standing Ninth Circuit and California case law. CELC members and Activision are interested in a carefully enunciated framework to evaluate noncompetes on a case-by-case basis that is consistent with California Business and Professions Code Section 16600. A per se rule goes too far and threatens to sacrifice enforceable contracts in favor of an improper rule of absolute certainty. CELC and Activision likewise are interested in the Court of Appeal's approach to employee releases. When terminations of employees occur, public policy favors an amicable resolution of any employee claims - severance pay in exchange for a release. CELC members routinely reimburse business expenses, separate and apart from the severance pay/release agreement. But, as set forth in more detail below, it is virtually impossible to list as an exception to a general release every claim that as a matter oflaw cannot be released. Under federal and state laws, there are innumerable claims that cannot be released. Therefore, California employers have regularly entered into severance pay/release agreements that contain general releases that do not either state the obvious 2

("This release does not apply to that which cannot be released.") or attempt to provide a laundry list of claims not covered because as a matter of law they cannot be released. CELC members and Activision therefore have the strongest possible interest in avoiding contentions based on the Court of Appeal decision that all of their severance pay/release agreements entered into in recent years are against public policy and void. CONCLUSION

For the foregoing reasons, CELC and Activision respectfully request that the Court grant them leave to participate in this proceeding as amici curiae and accept their proposed brief.

Dated: May /1, 2007

Respectfully submitted, PAUL, HASTINGS, JANOFSKY & WALKERLLP

By:---!e-~~~~~~~=-Paul Grossman Attorneys for Amici Curiae CALIFORNIA EMPLOYMENT LAW COUNCIL and ACTIVISION, INC.

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TABLE OF CONTENTS Page

I.

INTRODUCTION AND SUMMARY OF AMICI BRIEF

1

II.

CALIFORNlA BUSINESS AND PROFESSIONS CODE SECTION 16600 BARS ONLY THOSE CONTRACTS THAT RESTRAIN ONE FROM ENGAGING IN A PROFESSION, TRADE, OR BUSINESS

4

A.

Reasonably Limited Restrictions Which Tend More To Promote Than Restrain Trade Do Not Violate The Statute 1.

The statute does not provide a bright-line rule against covenants not to compete

4

The case law permits narrow restraints as outside the scope of Section 16600

5

The Analysis Of A Restrictive Covenant Should Begin With A Determination Of Whether Trade Secrets Or The Statutory Exceptions Are Involved, But Should Not End There. Rather, The Issue Is Whether There Is A Limitation On Specific Conduct Rather Than A True Restraint Of Competition

8

2. B.

C.

III.

4

Section 16600 Does Not Necessarily Invalidate An Agreement Delimiting How An Employee Can Compete: Several Concrete Factors May Be Used To Analyze Restrictive Covenants

11

D.

Public Policy Supports Narrow Restraints

13

E.

If This Court Rejects The Narrow Restraint Doctrine, That Rule Should Be Prospective Only

17

RELEASES ARE NOT VOID SIMPLY BECAUSE THEY DO NOT STATE THE OBVIOUS ("THIS RELEASE DOES NOT APPLY TO CLAIMS THAT CAc~OT BE WAIVED.") OR THE IMPOSSIBLE (LIST EVERY CONCEIVABLE CLAIM THAT CANNOT BE RELEASED) A.

Stating The Obvious Is Meaningless: Any Attempt To Apply A General Release To Claims Which Cannot As A Matter Of Law Be Released Would Be Void As To Those Claims, But Otherwise Valid

1

18

18

TABLE OF CONTENTS (continued) Page B. C.

D.

E.

N.

It Is Impossible To List All Claims Which Cannot Be Waived

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Requiring An Employer To List Every Claim That Cannot Be Included In A General Release Is Contrary To The General Principle That Releases Should Be Easily Understood

21

Competent Employee And Management Attorneys And Sophisticated Legal Treatises Have Long Advised Clients To Utilize Severance PaylRelease Agreements Containing General Releases

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If For Any Reason This Court Were To Agree With The Court Of Appeal That It Is Against Public Policy To Offer A SeverancelRelease Agreement That Does Not Expressly State That It Does Not Cover Unwaivable Claims, That Rule Should Be Prospective Only

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CONCLUSION

23

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TABLE OF AUTHORITIES Page CASES

Aetna Bldg. Maintenance Co. v. West, 39 Cal. 2d 198 (1952)

9

Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728 (1981)

20

Boughton v. Socony Mobil Oil Co., 231 Cal. App. 2d 188 (1964)

6, 7

Campbell v. Board ojTrustees ojLeland StanJord Junior Univ., 817 F.2d 499 (9th Cir. 1987) Dierlam v. Wesley Jessen Corp., 222 F. Supp. 2d 1052 (N.D. Ill. 2002) Edwards v. Arthur Andersen LLP, 142 Cal. App. 4th 603 (2006)

7 21

1, 3, 8,11,13,16

General Commercial Packaging, Inc. v. TPS Package Engineering, Inc., 126 F.3d 1131 (9th Cir. 1997) 7,8 Golden State Linen Serv., Inc. v. Vidalin, 69 Cal. App. 3d 1 (1977) Gordon v. Landau, 49 Cal. 2d 690 (1958)

11 5, 6, 11

In re: Marriage ojBrown, 15 Cal. 3d 838 (1976)

18

International Business Machines Corp. v. Bajorek, 191 F.3d 1033 (9th Cir. 1999)

8

John F. Matull & Associates, Inc. v. Cloutier, 194 Cal. App. 3d 1049 (1987)

11

Jones v. Humanscale Corp., 130 Cal. App. 4th 401 (2005)

11

King v. Gerold, 109 Cal. App. 2d 316 (1952)

6, 7,15

111

TABLE OF AUTHORITIES Page

u.s.

Latona v. Aetna Healthcare Inc., 82 F. Supp. 2d 1089 (C.D. Cal. 1999)

8

Loral Corp. v. Moyes, 174 Cal. App. 3d268 (1985)

8,9, 10, 11, 12

National Starch and Chemical Corp. v. Parker Corp., 219 N.J. Super. 158 (1987)

15

Richardson v. Sugg, 448 F.3d 1046 (8th Cir. 2006)

21

Werlinger v. Mutual Servo Cas. Ins. Co., 496 N.W.2d 26 (N.D. 1993)

17

Whyte V. Schlage Lock Co., 101 Cal. App. 4th 1443 (2002)

11, 16

Woods V. Young, 53 Cal. 3d 315 (1991)

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STATUTES

29U.S.C. §216(c)

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29 U.S.C. § 626(f)

21

29 U.S.c. § 626(f)(I)(A)

21

Cal. Bus. & Prof. Code § 16600

2,1,2,4,5,6,11,13, 17,23

Cal. Bus. & Prof. Code § 1660 1-16602.5

2

Cal. Civ. Code § 1643

12

Cal. Civ. Code § 3541

12

CAL. LAB. CODE § 206.5

20

Cal. Lab. Code § 2802

3,20

Cal. Lab. Code § 5001

20

Cal. Unemp. Ins. Code § 1342

20

IV

TABLE OF AUTHORITIES Page N.D. Cent. Code § 9-08-06

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OTHER AUTHORITIES Eric A. Posner & George G. Triantis, Covenants not to Compete from an Incomplete Contracts Perspective, at 1 (John M. Olin Program in Law & Economics Working Paper Series, 14 No. 137, 2d Series, 2001) Norman D. Bishara, Covenants not to Compete in a Knowledge Economy: Balancing Innovation from Employee Mobility Against Legal Protection for Human Capital Investment, 14, 17 27 Berkeley J. Emp. & Lab. L. 287, 296 (2006) Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants not to Compete, 74 N.Y.U.L. Rev. 575 (1999) 17

REGULATIONS 29 C.F.R. § 825.220(d)

20,21

v

I.

INTRODUCTION AND SUMMARY OF AMICI BRIEF

In the decision below, the Court of Appeal mistakenly created a bright-line rule against restrictive covenants. In Edwards, the court held that a contract barring a former employee from performing services for certain clients, while leaving him free to pursue his profession and serve any other clients is per se invalid under California Business and Professions Code Section 16600, unless: (1) it is necessary to protect trade secrets; or (2) it falls within the statutory sale-of-a-business or partnership-dissolution exceptions.! The Court of Appeal rejected the "narrow restraint" doctrine, most recently articulated by the Ninth Circuit (interpreting California law), as a misapplication of California law. This result is incorrect for three reasons. First, the plain language of Section 16600 does not invalidate all agreements that limit the manner in which a former employee may perform services for a competitor. Rather, the relevant test is whether the former employee is able to engage in his or her profession, trade, or business, notwithstanding the limitation. Second, the Court of Appeal contradicted significant case law allowing narrow restrictions. Third, the court improperly based its analysis on the propriety of so-called judicial "exceptions" to Section 16600. The proper approach focuses only on whether a contract falls within the ambit of Section 16600. Section 16600 does not bar all employee covenants not to compete. It does not even mention noncompetes. The statute provides:

Except as provided in this chapter, every contract by which anyone is restrained from

1 All subsequent statutory references are to the California Business and Professions Code unless otherwise noted.

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engaging in a lawful profession, trade, or business of any kind is to that extent void. CAL. Bus. & PROF. CODE § 16600. The only question that a court should consider when evaluating a noncompete that falls outside of the exceptions specified in Sections 16601 to 16602.5 is whether the contract restrains a person's ability to engage in a lawful profession, trade, or business. If the contractual language is narrowly tailored to the surrounding circumstances and leaves a substantial portion of the market available, it falls outside the scope of Section 16600. Alternatively, to the extent a contract actually restrains a person from engaging in his or her profession, trade, or business, it is void. The Court of Appeal also reached an incorrect result with respect to employee releases. Every year in California, on thousands of occasions, employers large and small, sophisticated and unsophisticated, peacefully resolve potential termination disputes with employees by providing severance pay in exchange for a general release. Normally, separate and apart from the severance agreement, these employers fully comply with their obligation to indenmify employees for expenses incurred in the course of their employment - indenmification is not at issue. However, the overwhelming majority of such severance pay agreements do not state the obvious - that the contractual release does not extend to matters that as a matter oflaw cannot be waived, such as indemnity rights. The Court of Appeal decision raises the specter that trial courts throughout California will be asked to declare void virtually every severance pay and release agreement entered into between California

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employers and employees over the last four years. The Edwards court held: Because employee indemnity rights under Labor Code Section 2802 implement public policy and inure to the public benefit, forcing an employee to waive his or her statutory rights violates public policy.

Edwards v. Arthur Andersen LLP, 142 Cal. App. 4th 603,630 (2006). The release in Edwards did not specifically include indemnity rights within its scope, and in fact exempted "any accrued and unpaid salary or other employee benefit or compensation," but the Edwards court nevertheless held: The [general release] did not expressly reference indemnity rights, but it did not have to: They were necessarily encompassed within the clear terms of the broad release. A broadly worded release covers all claims within the scope of the language, even if the particular claim is not expressly listed. 142 Cal. App. 4th at 629. Finally, Edwards stated: While Andersen is correct that a release of Edwards' indemnity rights would have been void, courts have rej ected the view that requiring an employee to sign an ineffective agreement is not wrongful simply because the provision would not be enforced. 142 Cal. App. 4th at 631. It cannot be the law that a general release which neither specifically

includes nor excludes a particular right that is not waivable is against public policy. Plaintiffs' counsel throughout the State of California will contend

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that if a release is against public policy the release is totally void. Employers throughout the State of California are unclear as to how to deal with the situation. Is it sufficient if the release states what should be obvious ("This release does not extend to matters that cannot as a matter of law be released.")? Or must employers attempt the impossiblespecifically provide in every release that it does not apply to the myriad claims that cannot lawfully be released under federal or state law? It is difficult to imagine a Court of Appeal decision that calls out more strongly for reversal.

II.

CALIFORNIA BUSINESS AND PROFESSIONS CODE SECTION 16600 BARS ONLY THOSE CONTRACTS THAT RESTRAIN ONE FROM ENGAGING IN A PROFESSION, TRADE, OR BUSINESS. A.

Reasonably Limited Restrictions Which Tend More To Promote Than Restrain Trade Do Not Violate The Statute. 1.

The statute does not provide a bright-line rule against covenants not to compete.

Section 16600 does not invalidate every covenant not to compete and every nonsolicitation agreement. It does not invalidate all contracts that bar a former employee from performing services for certain clients during a limited period of time. Section 16600 does not create a bright-line rule, and this Court should not adopt one. Because not all restrictive covenants are alike, they must be analyzed in the context of the parties, the public, and the relevant facts. Section 16600 implicates a wide variety of agreements, including outright bans on competition; client nonsolicitation agreements; employee

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nonsolicitation agreements; restrictions on the use of confidential or proprietary information (even if such information does not qualify as a trade secret); and severance agreements where a former employee is free to compete, but is paid a sum at the end of every month that he chooses not to do so. Not all of these agreements are per se invalid

many have been

approved by California courts and federal courts applying California law.

2.

The case law permits narrow restraints as outside the scope of Section 16600.

In evaluating contracts placing limitations on post-employment activities in competition with a prior employer, the case law goes beyond a perfunctory, mechanical inquiry into the existence of trade secrets and statutory exceptions. Instead, the law focuses on whether a given contract in fact prevents a person from carrying on his or her business. In Gordon v. Landau, 49 Cal. 2d 690 (1958), for example, the Court enforced a broad

customer nonsolicitation agreement, which provided in relevant part: Collector-Salesman further agrees that during the period of one (I) year immediately after the termination of his employment ... he will not, . . . directly or indirectly, ... either for himself or for any other person, firm, company or corporation, call upon, solicit, divert, or take away ... any of the customers, business or patrons of the Employer upon whom he called.

ld. at 692-93. While the Gordon court noted that the employer's customer

list was a trade secret, it also went on to consider whether "[t]he contract restrain[ed] defendant from engaging in a lawful profession, trade, or business within the meaning of [Section 16600]." ld. at 694. On this point, the court found that "[i]t clearly appears from the terms of the contract that 5

it did not prevent defendant from carrying on a weekly credit business or any business." Id. In other words, the incantation of a trade secret was not dispositive; the Supreme Court also analyzed the extent to which the specific contract at issue prevented a former employee from carrying on his business. A per se rule enforcing only those restrictive covenants that are necessary to protect trade secrets is inconsistent with the Gordon analysis. Gordon teaches that the test should not tum on a trade secrets "exception,"

but rather on the recognition that nondisclosure agreements and related restrictive covenants typically do not place enough of the market off-limits that a person is retrained from engaging in his or her trade. The narrow restraint doctrine is rooted in two decisions, Boughton v. Socony Mobil Oil Co., 231 Cal. App. 2d 188,192 (1964) and King v. Gerold, 109 Cal. App. 2d 316, 318 (1952). In Boughton, the court found

enforceable a contract that barred the plaintiffs from running a service station on a particular parcel ofland. 231 Cal. App. 2d at 192. The Boughton court reasoned:

While the cases are uniform in refusing to enforce a contract wherein one is restrained from pursuing an entire business, trade or profession, as falling within the ambit of section 16600, where one is barred from pursuing only a small or limited part of a business, trade or profession, the contract has been upheld as valid. Id. In King v. Gerold, the court held that a manufacturer's agreement not to

produce a specific trailer design after the expiration of a licensing agreement did not violate Section 16600, because the contract did not

6

preclude plaintiff "from carrying on his lawful business of manufacturing trailers." 109 Cal. App. 2d at 318. Based on this reasoning, the Ninth Circuit has concluded that the statute does not nullify "every part of every contract that restricts a person from pursuing, in whole or in part, any trade, business or profession." General Commercial Packaging, Inc. v. TPS Package Engineering, Inc.,

126F.3d 1131, 1132 (9thCir.1997). Rather: Even though the California Legislature rejected the common-law rule that "reasonable" restraints of trade are generally enforceable, it did not make all restrictions unenforceable .... "While the cases are uniform in refusing to enforce a contract wherein one is restrained from pursuing an entire business, trade or profession ..., where one is barred from pursuing only a small or limited part of the business, trade or profession, the contract has been upheld as valid." Id. (quoting Campbell v. Board of Trustees ofLeland Stanford Junior Univ., 817 F.2d 499,502 (9th Cir. 1987) and Boughton v. Socony Mobil Oil Co., 231 Cal. App. 2d 188 (1964)).

The facts of General Commercial Packaging, Inc. v. TPS Package Engineering, Inc. are illustrative of the rational for the narrow restraint

analysis. General Commercial Packaging ("General Commercial") was hired by its long-standing customer, Walt Disney Companies ("Disney"), to package materials for transport to the new EuroDisneyland, and sought a subcontractor to help. 126 F.3d at 1132. General Commercial chose TPS Packaging ("TPS"), who agreed that for one year after termination of the contract, it would not work directly for, or solicit Disney or any other 7

company which General Commercial had introduced and contracted to TPS. Id. at 1134. Every other customer for packaging services was fair

game for TPS to serve. With this agreement in place, General Commercial Packaging introduced TPS to Disney and its specialized needs. Before long, TPS began working directly for Disney, and General Commercial sued. Id. at 1132. The Ninth Circuit enforced the contract, holding: "Apart from Disney, TPS was not barred from soliciting work from any firm with which it had a prior relationship. The contract thus only limits TPS's access to a narrow segment of the packing and shipping market." !d. at 1134. See also International Business Machines Corp. v.

Bajorek, 191 F.3d 1033 (9th Cir. 1999) (applying narrow restraint doctrine); Campbell v. Bd. ofTrustees ofLeland Sanford Junior Univ., 817 F.2d 499,502 (9th Cir. 1999) (only restraints that prevent one from engaging in a lawful profession, trade or business are unlawful); Latona v.

Aetna Us. Healthcare Inc., 82 F. Supp. 2d 1089 (C.D. Cal. 1999) (applying narrow restraint doctrine).

B.

The Analysis Of A Restrictive Covenant Should Begin With A Determination Of Whether Trade Secrets Or The Statutory Exceptions Are Involved, But Should Not End There. Rather, The Issue Is Whether There Is A Limitation On Specific Conduct Rather Than A True Restraint Of Competition.

The thoughtful approach in Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985) demonstrates that the analysis does not end upon a determination of whether trade secrets 2 are implicated or the statutory 2 The Edwards court recognized that it has long been the law that restrictive covenants are valid to the extent they are necessary to protect trade secrets. 142 Cal. App. 4th at 609.

8

exceptions apply. In Loral, the challenged contract provided, in relevant part: As a condition for the foregoing payments, you will preserve the confidentiality of all trade secrets and other confidential information of Loral Corporation, Conic Corporation, and its TerraCom Division, and you will not now or in the future disrupt, damage, impair or interfere with the business of Conic Corporation, or its TerraCom Division whether by way of interfering with or raiding its employees, disrupting its relationships with customers, agents, representatives or vendors or otherwise. You are not, however, restricted from being employed by or engaged in a competing business. fd. at 274. PlaintiffLoral Corporation filed a lawsuit alleging that a former

executive, Robert Moyes, had breached this agreement by inducing employees to work for Moyes' new employer. The Loral court rejected Moyes' defense that the contract was unenforceable. First, the court recognized that while trade secret concerns may prohibit the solicitation of certain customers, "a contract may prohibit more than the law of the marketplace otherwise would." fd. at 275

(emphasis added). In other words, an enforceable nonsolicitation agreement may go beyond the protection of trade secrets under California law. fd. (citing Aetna Bldg. Maintenance Co. v. West, 39 Cal. 2d 198, 203 (1952). Similarly, the court noted that while the law of unfair competition may bar the solicitation of employees under certain circumstances, Moyes' contract went beyond this protection as well, and prohibited all employee solicitations, including those that were otherwise lawful. !d. at 275-76.

9

Nevertheless, the Loral court continued to analyze the contract's viability, recognizing that "reasonably limited restrictions which tend more to promote than restrain trade and business do not violate the statute." ld. at 276. Thus, even though Moyes' contract went beyond the parameters of trade secret and unfair competition law, and even though it limited the way in which he could compete with his former employer, it was not necessarily void. The Loral court reasoned: The potential impact on trade must be considered before invalidating a noninterference agreement. A contract must be construed to be lawful if possible. Defendant is restrained from disrupting, damaging, impairing or interfering with his former employer by raiding Conic employees under his termination agreement. This does not appear to be any more ofa significant restraint on his engaging in his profession, trade or business than a restraint on solicitation ofcustomers or on disclosure of confidential information. "[T]he May 4th agreement expressly permits Moyes to be employed by or engage in a competing business." !d. at 278-79 (emphasis added). Thus, the Loral court concluded:

The restriction presumably was sought by plaintiffs in order to maintain a stable work force and enable the employer to remain in business. This restriction has the apparent impact oflimiting Moyes' business practices in a small way in order to promote Conic's business. This noninterference agreement has no overall negative impact on trade or business. We hold that this contract, as construed, is not

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void on its face under Business and Professions Code section 16600. Id. at 280. Unlike the Edwards decision below, the Loral court followed a stepby-step evaluation that was consistent with precedent and the language of Section 16600.

3

Other decisions are consistent. John F. Matull &

Associates, Inc. v. Cloutier, 194 Cal. App. 3d 1049, 1054 (1987) (while Section 16600 "invalidates agreements which penalize a former employee for obtaining employment with a competitor, it does not necessarily affect an agreement delimiting how that employee can compete."); Jones v. Humanscale Corp., 130 Cal. App. 4th 401, 411 (2005) (arbitrator's decision upholding restrictive covenant was not palpably erroneous under California law) (citing Gordon v. Landau, 49 Cal. 2d 690 (1958)).4

C.

Section 16600 Does Not Necessarily Invalidate An Agreement Delimiting How An Employee Can Compete: Several Concrete Factors May Be Used To Analyze Restrictive Covenants.

With this precedent in mind, this Court should craft a clear framework to analyze the viability of restrictive covenants. The analysis should begin with the general proposition that when interpreting a The Edwards court failed to distinguish Loral, suggesting incorrectly that it was decided solely on the basis that Loral possessed trade secrets. Edwards, 142 Cal. App. 4th at 615. 4 See also Golden State Linen Serv., Inc. v. Vidalin, 69 Cal. App. 3d 1, 9 (1977) (noncompete enforceable "insofar as it provides the affected employee will not solicit [the employer's] customers after leaving its employ"); Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1462 (2002) ("Further, Business and Professions Code section 16600 generally does not invalidate a noncompetition agreement that merely prohibits solicitation of the former employer's customers.") (citation omitted). 3

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contractual provision, a court "must ... construe[] [it] to be lawful if possible." Loral Corp., 174 Cal. App. 3d at 278-79 (citing Cal. Civ. Code §§ 1643,3541). From there, the Court should examine the actual text of the contract and the surrounding circumstances, in light of the following factors: •

Confidential Information/Unlawful Conduct: Does the contract protect a party's confidential, proprietary, or trade secret information? How valuable is the confidential information? How essential is the provision to protecting against the employee's ability to place the information at risk? Does the contract guard against unlawful conduct or unfair competition?

•

Scope ofthe Restriction: Is the restriction reasonable, evaluated in terms of the employer, the employee and the public? Does the agreement merely delimit how a former employee can compete? Is the provision more like a "noncompetition agreement which is invalid, or a nondisclosure or nonsolicitation agreement which may be valid"? Loral, 174 Cal. App. 3d at 268.

•

Impact On Trade: How does the agreement impact trade? Does the contract contain reasonably limited restrictions which tend more to promote than restrain trade and business? Does the agreement have an overall positive or negative impact on trade or business? Does the restriction impact business practices in a limited way in order to promote the employer's business?

•

Other Employment: Does the contract penalize a former employee from obtaining employment with a competitor or engaging in a competing business? Does the restriction impose only modest limitations in the manner in which the employee can perform services for a competitor? How is the person hampered from seeking employment?

By applying these factors to the facts in a particular case, a court can determine whether particular covenants fall within the prohibitions of

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Section 16600. While this approach requires greater factual inquiry than the per se rule in Edwards, it is a more reasonable approach and is consistent with the case-by-case approach required in many areas oflaw. In comparison, Edwards' bright-line rule is unreasonable and threatens to sacrifice enforceable covenants in favor of an improper rule of absolute certainty. This is too great a price.

D.

Public Policy Supports Narrow Restraints.

Policy concerns support the narrow restraint doctrine because it is the only approach that balances all of the public policy goals implicated by Section 16600. The Court of Appeal focused only on the importance of employee mobility and the possibility that under a narrow restraint framework, employers have an incentive to push the envelope of the "narrowness" requirement, leaving employees with the task of guessing whether a court might find a particular restriction enforceable. While unfettered employee mobility is an important objective in California, it is not the only legitimate concern. Certain restrictive covenants have positive effects on trade and offer both businesses and employees significant advantages. Two of the most important objectives are encouraging corporate investment in employee talent and client relationships, and protecting confidential information. For example, a small financial services firm may hire and train a worker to service a key client who provides most of the firms' revenue, but has very little impact on the overall financial services market. Hoping to protect its business, the firm may ask the employee to sign an agreement not to solicit or perform work for the client for a reasonable time after leaving. If this

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agreement has no impact on the employee's ability to engage in his profession, trade, or business after leaving the firm, it should be enforced. Under this scenario, the company benefits by building a strong client base and protecting confidential information about its client. The client benefits from having a consistent contact at the firm who is familiar with its preferences and needs. The worker benefits by learning how to manage a key client relationship over time. This is likely to increase the worker's earning power and marketability. Without an enforceable restrictive covenant, the now more valuable worker can use his new knowledge and established client relationship to take the client to a competitor. Because the first employer would never realize a return on its investment in training the employee and fostering his client relationship, the lack of an enforceable restrictive covenant would provide a disincentive to making such investments in the first place. 5 Narrowly drafted restrictive covenants may be the only sure way to protect trade secrets and valuable confidential information, while adding

5 See generally Eric A. Posner & George G. Triantis, Covenants not to Compete from an Incomplete Contracts Perspective, at 1 (John M. Olin Program in Law & Economics Working Paper Series, No. 137, 2d Series, 2001), available at http://www.law.uchicago.edu/Lawecon/index.html (employers who invest in an employee's training often will not recoup this investment through the employee's improved skills for many years after the training is complete); Norman D. Bishara, Covenants not to Compete in a Knowledge Economy: Balancing Innovation from Employee Mobilitv Against Legal Protection for Human Capital Investment, 27 Berkeley J. Emp. & Lab. L. 287, 296 (2006) ("It is then no surprise that employers and investors want assurance that their investment in talented employees is secure. This is especially true when employees might leave the firm, strike out on their own, and compete with the firm that helped them develop valuable skills in the first place.").

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clarity to the bargaining process and conserving judicial resources. Consider for example, an employee who, for one employer, develops a glue for a highly specialized application through an expensive trial and error process. After many years, the employee leaves to work for a competitor, where he is told to develop a glue for the same application. The employee starts the new job, eager to do his best work for the new employer, but comes to realize that he is unable to develop the glue without drawing upon what he learned at the first employer. He has two choices: (1) remove himself from the assignment and risk termination; or (2) continue to work on the competing product and risk litigation. Even if the employee chooses the latter approach with the purest intentions, he unwittingly may rely on his former employer's trade secrets. Costly litigation is likely to follow. The employee may lose his job, the second employer may lose the lawsuit, and the first employer may suffer irreparable injury, especially if it is too late for injunctive relief and if monetary damages are impossible to quantify. All of the parties in this scenario would have benefited from a narrow restrictive covenant, like the agreement in King v. Gerold, specifying that the employee is free to compete, so long as he does not work on the same type of glue he perfected for the prior employer. Then, each would have bargained with clarity as to the parameters of the employee's limitations and the first employer's interests. Litigation would have been avoided and judicial efficiency served. 6

This hypothetical was inspired by National Starch and Chemical Corp. v. Parker Corp., 219 N.J. Super. 158 (1987). There, the employer had not protected itself through a noncompete. Recognizing the dilemma of the 6

15

The narrow restraint doctrine has been good law for many years. Countless employers have relied upon it when drafting employment contracts and severance agreements. If this Court affirms the Edwards' decision, plaintiffs' counsel will argue that all of these agreements are per se void. This in tum will increase litigation, as former employees file

innumerable interference claims like those asserted by Mr. Edwards, even though their agreements were consistent with the law at the time. As even the Edwards Court of Appeal acknowledged, "[I]t is not difficult to imagine situations in which making only a few clients offlimits would greatly limit competition, whereas under different circumstances a much broader restriction could leave a substantial portion of the market open." 142 Cal. App. 4th at 622. This exact reasoning supports a case-bycase analysis, in which facts are examined to determine whether a particular covenant is reasonable in light of the circumstances. A bright-line rule that ignores such nuances would be a disservice to employers, employees, and society alike, and would impose restraints on employers that the legislature

employee who simply could not perform part of his new job without placing trade secrets at risk, the court granted injunctive relief under the doctrine of inevitable disclosure. Amici Curiae here do not invite such judicial activism. The California Court of Appeal has rejected the inevitable disclosure doctrine, noting in Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1462-63 (2002) that the chief ill is its after-the-fact nature: it is imposed after the employment contract is made and therefore alters the employment relationship without the employee's consent. Conversely, a narrow contractual restriction permits the parties to negotiate their affairs from the beginning with a complete understanding and agreement as to their expectations and limitations. 16

did not impose in enacting Section 16600. Noncompetes are not per se anticompetitive, and should not be rejected outright.

E.

7

If This Court Rejects The Narrow Restraint Doctrine,

That Rule Should Be Prospective Only. A rejection of the narrow restraint doctrine will be a dramatic departure from a line of precedent on which many employment contracts have been based. This Court has on many occasions made such dramatic changes prospective only. Woods v. Young, 53 Cal. 3d 315,330 (1991) (Prospective application only because of reliance on prior body oflaw and unforeseeability of change; "Considerations of fairness and public policy may require that a decision be given only prospective application."

Whether Section 16600 has fueled the unprecedented growth of Silicon Valley is a subject of serious debate. See, supra, 27 Berkeley J. Emp. & Lab. L., at 308-09 (citing Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants not to Compete, 74 N.Y.U.L. Rev. 575 (1999)(other citations omitted». The economic boom in Silicon Valley also may be attributed to a culture that views failure positively, easy access to numerous job opportunities in the same general area, post-WWII government investment in research, and contributions from nearby universities. Id. Many states that allow reasonable restrictive covenants have seen economic success in industries ranging from pharmaceuticals to financial services. Conversely, not all states with strict prohibitions against noncompetes have experienced the economic success of California. North Dakota has a law so similar to Section 16600 that California decisions are considered persuasive authority. Werlinger v. Mutual Servo Cas. Ins. Co., 496 N.W.2d 26, 30 (N.D. 1993) (citations omitted); N.D. CENT. CODE § 9-08-06 ("every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void," except when restraint is in connection with the sale of a business or dissolution of a partnership). However, North Dakota has yet to replicate the success of Silicon Valley. This suggests that forces beyond Section 16600 are responsible for California's economy. Ubiquitous stock option grants and the temperate climate are equally likely to have played a part. 7

17

[citations omitted]); In re: Marriage ofBrown, 15 Cal. 3d 838,850 (1976) (Retroactivity "might reopen controversies long settled"). If for any reason this Court were to agree with the Court of Appeal and expressly reject the narrow restraint doctrine, this Court should clarify that this rule would be prospective only. III.

RELEASES ARE NOT VOID SIMPLY BECAUSE THEY DO NOT STATE THE OBVIOUS ("THIS RELEASE DOES NOT APPLY TO CLAIMS THAT CANNOT BE WAIVED.") OR THE IMPOSSIBLE (LIST EVERY CONCEIVABLE CLAIM THAT CANNOT BE RELEASED). A.

Stating The Obvious Is Meaningless: Any Attempt To Apply A General Release To Claims Which Cannot As A Matter Of Law Be Released Would Be Void As To Those Claims, But Otherwise Valid.

Consider the following alternatives: Alternative No.1 Employee agrees to release the Company from all claims or demands Employee may have based on Employee's employment with the Company or the termination of that employment. This includes a release of any rights or claims Employee may have under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Equal Pay Act, or any other federal, state or local laws or regulations prohibiting employment discrimination. This also includes a release by Employee of any tort or contract claims for wrongful discharge. Alternative No.2 Employee agrees to release the Company from all claims or demands Employee may have based on Employee's employment with the Company or the termination of that 18

employment. This includes a release of any rights or claims Employee may have under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Equal Pay Act, or any other federal, state or local laws or regulations prohibiting employment discrimination. This also includes a release by Employee of any tort or contract claims for wrongful discharge. This release does not release claims that as a matter oflaw cannot be released. With respect to an average employee offered a severance payment in exchange for a release of legal claims, there is no real-world difference between Alternative No.1 and Alternative No.2. If the employee consults an attorney, under Alternative No.1 the attorney will explain that rights such as indemnification rights cannot be released as a matter oflaw, and with respect to Alternative No.2, will tell the employee the same thing. If the employee does not consult an attorney, there will be no difference whatsoever between Alternative No.1 and Alternative No.2 - the employee will not have the faintest idea what claims cannot be released as a matter oflaw. This Court should therefore state the obvious: Any attempt to apply a general release to claims which cannot as a matter of law be released would be void as to those claims, but otherwise valid. B.

It Is Impossible To List All Claims Which Cannot Be

Waived. The Court of Appeal appeared to believe it would be a simple matter to add a provision such as the following to all releases: "This release does not release claims which as a matter oflaw cannot be waived, including

19

claims to indemnity rights under Labor Code Section 2802." Well and good - that would be easy to do. But there are innumerable other claims that under federal and state law as a matter of law cannot be waived. Examples include: •

Wages due: No release of claims for wages due. CAL. LAB. CODE § 206.5.

•

Workers' compensation: No release of workers' compensation claims without approval by appeals board or referee. CAL. LAB. CODE § 5001.

•

Unemployment: No release of unemployment compensation benefits except as provided in four code sections. CAL. UNEMP. INS. CODE § 1342.

•

FLSA: No release of claims under the FLSA without supervision from the Secretary of Labor or court approval. 29 U.S.c. § 216(c); Barrentine v. Arkansas-Best Freight Sys.,

Inc., 450 U.S. 728, 740 (1981) ("Thus, we have held that FLSA rights cannot be abridged by contract or otherwise waived because this would 'nullify the purposes' of the statute and thwart the legislative policies it was designed to effectuate."). •

FMLA: Some courts hold no release of proscriptive or substantive rights under the FMLA. 29 C.F.R. § 825.220(d); No. 05-2336, Dougherty v. TEVA Pharms. USA, 2007 U.S. Dist. LEXIS 27200, at *24-25 (E.D. Pa. 2007) (employee

20

may not waive proscriptive or substantive rights under FMLA); cf Dierlam v. Wesley Jessen Corp., 222 F. Supp. 2d 1052, 1055 (N.D. Ill. 2002) ("no reason not to accept the plain language of the regulation on its face and apply § 825.220(d) to bar enforcement of a general waiver of FMLA rights"). •

Title VII: No release of prospective claims under Title VII.

Richardson v. Sugg, 448 F.3d 1046, 1054 (8th Cir. 2006) ("A number of other circuits have also held, relying on Gardner-

Denver, that persons may not contract away prospective claims under Title VII."). •

ADEA: Release of age discrimination claims void if no right to revoke set forth in release. 29 U.S.C. § 626(f).

The Court of Appeal's simplistic view that at a minimum the employer could have expressly written that it was not requiring a waiver of indenmification rights ignores the fact that its rationale (it is against public policy for a general release not to specify as excluded from the release claims that cannot be waived) is applicable to each and every claim that cannot be covered by a release. C.

Requiring An Employer To List Every Claim That Cannot Be Included In A General Release Is Contrary To The General Principle That Releases Should Be Easily Understood.

Numerous courts and statutes have enunciated the principle that release agreements should be written as simply as possible. See, e.g., the Older Workers Benefit Protection Act, 29 U.S.C. § 626(f)(I)(A) (release of 21

ADEA claims is void unless the release "is written in a manner calculated to be understood by [the] individual. ..."). Requiring terminated employees and companies, large and small, who simply want to exchange money for a promise not to sue, to draft complex agreements that exclude from coverage each and every claim that under federal or state law is not waivable is antithetical to public policy.

D.

Competent Employee And Management Attorneys And Sophisticated Legal Treatises Have Long Advised Clients To Utilize Severance PaylRelease Agreements Containing General Releases.

It is important to keep a severance pay/release agreement as simple

as possible in the absence of a negotiated agreement where the employee is represented by counsel. Clarity and understanding are the objective. The typical standard form release does not include language stating the obvious ("This release does not cover claims that cannot be released.") or attempt a laundry list of claims which cannot be released. It does include an exemption for what an employee is most likely to be concerned about ("This release does not include, however, a release of Employee's right, if any, to pension, health or similar benefits under the Company's standard programs."). Such clear, understandable releases do not violate public policy where there is no dispute between employer and employee about indemnification, and both sides fully understand that the employee is giving up whatever rights can be surrendered in exchange for severance pay. Indemnification of business expenses is rarely an issue in the negotiation of severance agreements. Many of the leading treatises, including Justice Chin's, propose releases that do not contain language excluding claims that cannot statutorily be waived.

22

E.

If For Any Reason This Court Were To Agree With The Court OfAppeal That It Is Against Public Policy To Offer A SeverancelRelease Agreement That Does Not Expressly State That It Does Not Cover Unwaivable Claims, That Rule Should Be Prospective Only.

A rule oflaw that any general release that does not expressly exclude from its coverage claims that cannot statutorily be waived is against public policy would be a dramatic change with respect to California release law. As noted above, this Court often makes such dramatic changes prospective only. Any decision to affirm the Court of Appeal on the release issue should be prospective only. IV.

CONCLUSION Covenants containing limited restrictions provide companies with an

incentive to invest in employee talent, training and experience with key clients. Employees reap the rewards in the form of increased marketability and earning power. Reasonably limited restrictions, which tend more to promote than restrain trade should not be found to violate the Section 16600. Further, the rules oflaw applicable to releases are of vital concern to California employers and employees. The Court of Appeal's decision should be reversed, and the trial court's final judgment reinstated. Dated: May II ,2007

Respectfully submitted, PAUL, HASTINGS, JANOFSKY & WALKER LLP

By:

--"'~'--~--'--'--

Paul Grossman

Attorneys for Amici Curiae CALIFORNIA EMPLOYMENT LAW COUNCIL and ACTIVISION, INC.

23

_

CERTIFICATE OF WORD COUNT Counsel certifies that, based on the Microsoft Word word counting feature, the total number of words in this brief, including footnotes, is 7,808. Cal. Rules of Court, Rule 28.1(d)(I).

Dated: May fl, 2007

BY:~ Paul Grossman Attorneys for Amici Curiae CALIFORNIA EMPLOYMENT LAW COUNCIL and ACTIVISION, INC.

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PROOF OF SERVICE I am employed in the City of Los Angeles, County of Los Angeles, State of California. I am over the age of 18, and not a party to the within action. My business address is as follows: 515 South Flower Street, 25th Floor, Los Angeles, California 90071. On May 11,2007, I served the foregoing document(s) described as:

APPLICATION FOR LEAVE TO FILE AN AMICI CURIAE BRIEF AND PROPOSED AMICI CURIAE BRIEF IN SUPPORT OF DEFENDA1~T, RESPONDENT, AND PETITIONER ARTHUR ANDERSEN LLP on the interested parties by placing a true and correct copy thereof in a sealed envelope(s) addressed as follows:

SEE ATTACHED SERVICE LIST VIA U.S. MAIL:

I am readily familiar with the firm's practice of collection and processing of correspondence for mailing. Under that practice such sealed envelope(s) would be deposited with the U.S. postal service on May II, 2007 with postage thereon fully prepaid, at Los Angeles, California.

I declare under penalty of peJjury under the laws of the State of California that the above is true and correct. Executed on May 11,2007, at Los Angeles, California. Virginia Allen Type or Print Name

SERVICE LIST Richard A. Love, Esq. Beth A. Shenfeld, Esq. Law Offices of Richard A. Lowe 11601 Wilshire Boulevard, Suite 2000, Los Angeles, CA 90025 Attorney for Plaintiff and Appellant Raymond Edwards II

Mark J. Poster, Esq. Robin Meadow, Esq. Greines, Martin, Stein & Richland LLP 5700 Wilshire Blvd., Suite 375 Los Angeles, CA 90036-3626 Attorney for Plaintiff and Appellant Raymond Edwards II

Wayne S. Flick, Esq. Yury Kapgan, Esq. Latham & Watkins LLP 633 West Fifth Street, Suite 4000 Los Angeles, CA 90071-2007 Attorneys for Defendant and Respondent Arthur Andersen LLP

Kristine L. Wilkes, Esq. Colleen C. Smith, Esq. Shireen M. Becker, Esq. Latham & Watkins LLP 600 West Broadway, Suite 1800 San Diego, CA 92101-3375 Attorneys for Defendant and Respondent Arthur Andersen LLP

Sharon A. McFadden, Esq. Arthur Andersen LLP 33 West Monroe Street, Floor 18 Chicago,IL 60603-5385 (courtesy copy) Attorneys for Defendant and Respondent Arthur Andersen LLP

Erika C. Frank, Esq. General Counsel California Chamber of Commerce 1215 K Street, Suite 1400 Sacramento, CA 95812-1736 Amicus Curiae Attorneys

Jeffrey A. Berman, Esq. Sidley Austin LLP 555 W. Fifth Street, Suite 4000 Los Angeles, CA 90013-1010 Amicus Curiae Attorneys

Scott H. Dunham, Esq. Christpher W. Decker, Esq. O'Me1veny & Myers LLP 400 S. Hope Street Los Angeles, CA 90071-2899 Amicus Curiae Attorneys

Clerk of the Court California Court of Appeal Second District, Division Three 300 South Spring Street Second Floor Los Angeles, CA 90013

Clerk of the Court Superior Court of Los Angeles 111 N. Hill Street Los Angeles, CA 90012