Amicus Brief Kastner Banchero Supporting Edwards

No. S147190

IN THE SUPREME COURT OF THE STATE OF CALIFORNIA RAYMOND EDWARDS II, Plaintiff and Appellant,

v.

ARTHUR ANDERSEN, LLP Defendant and Respondent

After a Decision by the Court of Appeal Second Appellate District, Division Three, Case No. B 178246 Los Angeles Superior Court, Case No. BC 294853 Andria K. Richey, Judge Presiding

APPLICATION FOR LEAVE TO FILE BRIEF AMICUS CURIAE OF KASTNER BANCHERO LLP IN SUPPORT OF RESPONDENT RAYMOND EDWARDS II

KASTNERBANCHEROLLP Eric C. Kastner, SBN 53858 Scott R. Raber, SBN 194924 20 California Street, 7th Floor San Francisco, California 94111 415-398-7000/ Facsimile (4T5) 616.. 7000 [email protected]

INTRODUCTION

Pursuant to California Rules of Court, Rule 8.520(£), we respectfully request leave to file the attached brief of amicus curiae Kastner Banchero LLP in support of Raymond Edwards II. This application is timely made within thirty days after filing of the reply brief on the merits. THE AMICUS CURIAE

Kastner Banchero LLP ("KB") is a ten-attorney law firm with offices in San Francisco and Palo Alto, California. A significant portion of KB' s practice involves employment issues relating to individual executives. KB lawyers regularly draft and negotiate employment, severance, change of control and other employment-related agreements. In addition, KB attorneys often represent employees in litigation against their current and former employers in matters relating to purported breaches of noncompetition agreements, trade secret matters, and other employment-related disputes. KB estimates that its lawyers have, collectively, represented nearly three thousand individual employees over the past twenty-three years. INTEREST OF AMICI CURIAE AND NEED FOR FURTHER BRIEFING

The issues presented in this case directly bear on the livelihoods of our clients, and on employment situations that we see daily in our practice. The resolution of the issues before the Court will have a profound impact on our clients' employment mobility, and their ability to engage in employment of their choosing, free from threats of litigation. Amicus curiae KB is familiar with the issues before this court and the scope of their presentation. The amicus curiae believes that further briefing is necessary to address matters not fully addressed by the parties' briefs: namely, the practical experience of individual employees under existing California non-competition law, and the laws of other states, and their related policy ramifications. Kastner Banchero routinely finds itself in the proverbial "trenches" with respect to the issues presented on

this appeal; thus, it is in a relatively unique position to offer some real-life examples of how the enforcement or attempted enforcement of non-competition covenants affect California employees (and employers). Kastner Banchero's attorneys regularly represent employees both within and outside California who are party to ·non-competition and release agreements of the kinds that are at issue. Accordingly, we believe our practical experience may provide some useful insight into the ramifications of the issues on this appeal. CONCLUSION

For the foregoing reasons, amicus curiae KB respectfully requests that the court accept the accompanying brief for filing in this case.

Dated: May 14,2007

Respectfully submitted,

KASTNER BANCHERO LLP

Scott R. Raber

PROOF OF SERVICE

I am over eighteen years of age, not a party to this case and am employed in the county of San Francisco. My business address is 20 California Street, Floor Seven, San Francisco, California 94111, and I am readily familiar with the firm's business practice for collection and processing of correspondence for mailing with the United States Postal Service. On Monday, May 14, 2007, in the ordinary course of business, I served the attached PETITION FOR LEAVE TO FILE AMCUS CURIAE BRIEF by placing a true copy thereof in a sealed envelope with first class postage affixed, in a U.S. Mail box, addressed as follows:

SEE ATTACHED LIST

I certify under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed in San Francisco, California on May 14, 2007

~~~~-

SERVICE LIST LAW OFFICES OF RICHARD A. LOVE Richard A. Love 11601 Wilshire Blvd., Shjueti 200 Los Angeles California

GREINES, MARTIN, STEIN & RICHLAND LLP Marc 1. Post 5700 Wilshire Blvd., Suite 375 Los Angeles, California 90036-3625

Wayne S. Flick, Esq. Yury Kapgan, Esq. Latham & Watkins LL:P 633 West Fifth St., Suite 4000 Los Angeles, CA 90071-2007

Kristine L. Wilkes, Esq. Colleen C. Smith, Esq. Shireen M. Becker, Esq. Latham & Watkins 6000 West Broadway, Suite 1800 San Diego, CA 92101-3375

Shareen A. McFadden Arthur Anderson LLP 33 West Monroe St., Floor 18 Chicago, IL 60603-5385 Attorneys for Defendant Arthur Anderson LLP

Honrable Andria K. Richey Los Angeles Superior Court 111 North Hill St. Los Angeles, CA 90012

Office of the Clerk Court of Appeal; Second Appellate District, Div. 3 300 South Spring St. Second Floor, North Tower Los Angeles, CA 90013-1233

No. 8147190

IN THE SUPREME COURT OF THE STATE OF CALIFORNIA RAYMOND EDWARDS II, Plaintiff and Appellant,

v. ARTHUR ANDERSEN, LLP Defendant and Respondent

After a Decision by the Court of Appeal Second Appellate District, Division Three, Case No. B 178246 Los Angeles Superior Court, Case No. BC 294853 Andria K. Richey, Judge Presiding

AMICUS CURIAE BRIEF OF KASTNER BANCHERO LLP IN SUPPORT OF RAYMOND EDWARDS II

KASTNERBANCHEROLLP Eric C. Kastner, SBN 53858 Scott R. Raber, SBN 194924 20 California Street, i h Floor San Francisco, California 94111 415-398-7000/Facsimile (415) 616-7000 [email protected]

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Table of Contents

INTRODUCTION

2

INTEREST OF THE AMICUS CURIAE

.3

STATEMENT OF FACTS ARGUMENT

3 3

A. Internet Retailer v. ChiefExecutive Officer

6

B. Various Venture Capital Entities v. High Tech Company Founder

8

CONCLUSION

13

CERTIFICATE OF COMPLIANCE.

13

Table of Authorities

STATUTES

Business & Professions Code § 16600 Business & Professions Code §§ 16601 and 16602, Business & Professional Code §§ 16601-16602.5 Florida Statutes Annotated § 542.335 Labor Code section 2802 Labor Code section 2802

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3, 5, 10, 11 .4 .4 6 12 13

INTRODUCTION

For decades, California's prohibition on employee non-competition covenants has stood as a bulwark against overpowering interference by business with employees' freedom to seek employment of their choosing. This freedom has played a significant role in driving California's economic engine as employees leave one employer for another with potentially competitive ideas. Recognizing the threat that restrictive covenants pose to employees' mobility and freedom to work, the Legislature strictly limited the statutory exceptions to Business & Professions Code § 16600 ("Section 16600") to a narrowly defined set of circumstances. Those limited statutory exceptions have also served California businesses well - allowing them to compete freely for the best talent. If the Legislature had intended a "narrow restraint" exception, or any similar relaxation to the general prohibition on employee non-competition agreements, it could - and presumably would have actually enacted them. The Legislature has not done so, and the Court should not now take up the task of writing new terms into the statute. Furthermore, the need for a clear affirmation of existing law that generally prohibits employee non-competition agreements under Section 16600 is paramount. In the absence of such bright-line clarity, employeesand the attorneys who advise them - will lack assurance that they will be able to take subsequent employment without the risk of being sued for running afoul of purported "narrow restraints" in their non-competition agreements. Conversely, under the reading of Section 16600 proposed by Arthur Andersen, employers will be unleashed to harass and restrain employees with devastating results to employees' freedom and, ultimately, California's economy.

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INTEREST OF THE AMICUS CURIAE As set forth in the accompanying Application for Leave to File Brief Amicus Curiae, the undersigned amicus Kastner Banchero LLP ("KB") is a ten-attorney law firm with offices in San Francisco and Palo Alto, California. A significant portion ofKB's practice involves the representation of individual executives in employment-related matters. KB clients comprise employees in litigation against their current and former employers in matters relating to purported breaches of non-competition agreements, trade secret matters, and other employment disputes. KB lawyers regularly draft and negotiate employment, severance, change of control and other employment-related agreements. KB estimates that its lawyers have, collectively, represented nearly three thousand individual employees over the past twenty-three years. Amicus KB submits this brief to provide the Court with some practical perspective as to how the two issues presented on this appeal often unfold under "real world" conditions - and, in particular, why existing California law correctly disfavors non-competition agreements between employees and employers as a matter of public policy.

STATEMENT OF FACTS KB hereby incorporates the statement of facts set forth in the Answering Brief of Raymond Edwards.

ARGUMENT I.

SOUND POLICY REASONS EXIST FOR THE COURT

TO ADHERE TO CALIFORNIA PRECEDENT AND THE PLAIN LANGUAGE OF BUSINESS & PROFESSIONS CODE

§ 16600, WHICH PROHIBIT NON-COMPETITION AGREEMENTS The actual text of California Business & Professions Code § 16600 ("Section 16600") could not be clearer: the statute prohibits "every contract 3

by which anyone is restrained from engaging in a lawful profession, trade or business." (Emphasis added.) The sections following Section 16600 delineate the sole exceptions to the general rule disallowing noncompetition agreements between employers and employees (e.g., the sale of a business to protect goodwill, dissolution of partnership interests). Cal. Bus. & Prof. Code §§ 16601-16602.5. The bright-line rule that has developed under California law, prohibiting the application of non-competition agreements to individual employees, not only adheres to the Legislature's express intent, but also rests on sound policy principles which, if anything, have only grown in importance as employers in and outside of California increasingly attempt to use non-competition agreements offensively - for anti-competitive and in terrorem reasons.

There simply is no basis for allowing "narrow restraints" or for fashioning "reasonable" restraint tests where the Legislature has not expresslyprovid~d for

them. Unlike other states' statutory schemes,

Section 16600 includes no "reasonableness" or other limiting exception for presumptively allowing employee non-competition agreements. California courts have rightly upheld non-competition agreements only to the extent they fall within the exceptions established by Business & Professions Code §§ 16601 and 16602, or encompass the use of trade secrets. While Andersen claims that it actually had no interest in binding Edwards or preventing him from practicing his profession (OB 6), many employers do not take such a benign view of their non-competition agreements. Indeed, employers often assert violations of non-competition agreements when it suits their own purposes - and for reasons entirely unrelated to the "competitive" impact of the departing employee. Even now, we routinely see in our practice employers who try toand actually do - impose non-competition covenants offensively, without 4

regard to the weight of California case law prohibiting employee noncompetition agreements. How does such conduct arise? In California, employers frequently write covenants not to compete into employment agreements, even though they know the provisions stand little chance of being upheld under current law. As with Edwards, employers with businesses in several states try to see how far they can push restrictive covenants in California. Employers also effectively invoke noncompetition covenants in conjunction with trade secrets allegations; in such scenarios, the employer will threaten departing employees with litigation when they join what the company believes is a "competitive" business - no matter how sterling an individual employee's prior record - on the basis that the employee has allegedly misappropriated trade secrets, might reveal them, or will necessarily divulge proprietary information in their new position. In other states, where "narrow" non-competition covenants are allowed, employers may seek to exclude their employees from broad, purportedly "competitive" segments of industry or territory. If Section 16600 is deemed to allow "reasonable" or "narrow" noncompetition agreements, so long as they are not outright "prohibitions" on an employee's trade, it will only lead to further encroachment on California employees'rights. Under the rule advanced by Andersen, each case, no matter how meritless, will necessarily devolve into a fact inquiry as to the exact nature and scope of the purported "competition" between the former and current employer before it can be dismissed or tried. In jurisdictions where non-competition agreements are presumptively valid in certain circumstances, or at least readily subject to a factual dispute about their validity that precludes summary judgment in favor of the employee, employees lose. In practice, the "narrow restraint" reading that Arthur Andersen erroneously says California law allows really would amount to presumptive 5

restraints and control over employees; the mere possibility of an injunction and substantial legal bills resulting from a lawsuit for purported breach of non-competition provisions operate to chill employee mobility even further than already occurs, irrespective of actual competition. The rule also would provide employees, and the businesses who might hire them, with little prospective guidance as to whether employees will be able to leave safely their current employment for other opportunities without the imposition of liability. Moreover, to allow a "trade secrets" exception to Section 16600 beyond the Uniform Trade Secrets Act would be superfluous: the latter statute more than accomplishes its intended goals of restraining "unfair competition" (e.g., the misappropriation of trade secrets) and providing employers ample tools for protecting proprietary knowledge and information. The following actual, recent examples from our clients demonstrate many of the foregoing issues that arise from employee non-competition agreements, and the very real problems that arise for employees 1: A.

Internet Retailer v. ChiefExecutive Officer

Internet Retailer, a California company, sued its former Chief Executive Officer (a long-time California resident), alleging that CEO, an at-will employee, "may" have breached his non-competition agreement and seeking a declaration of the parties' rights under the non-competition agreement and Florida Statutes Annotated § 542.335 (which governs Florida employee non-compete agreements). On such grounds, Internet Retailer refused to honor CEO's vested stock options when CEO attempted to exercise them. Although CEO - like the almost two hundred other employees at his company - was a California employee, he had signed an employment Because the parties to these cases are not parties to this amicus brief, we have substituted their names with descriptive phrases. 6

agreement that required the application of Florida law to his employment relationship, presumably because Internet Retailer's parent company ("Parent Company") was based in Florida. CEO's Employment Agreement contained a restrictive covenant prohibiting CEO from engaging in "any" business that directly or indirectly competed with any "parent, subsidiary or affiliate [of Internet Retailer] within the United States in the fields of online, video or electronic retailing during [CEO's] employment and for an eighteen month period" after termination. Florida, it should be noted, essentially allows the "narrow restraint" approach espoused by Arthur Andersen: non-competition agreements are allowed insofar as they are reasonable in duration and geographic scope. At the time Internet Retailer filed its suit against CEO, CEO served on the Board of Directors of an online "lead generation" website. Other than being an internet business, the purported "competitor" did not actually sell products, but sent sales leads of possible customers to other companies, some of whom sold products competitive to Internet Retailer. Further compounding the dispute, CEO's employment agreement contained an arbitration provision, mandating arbitration before the American Arbitration Association in Florida, although his stock option agreement contained no such provision and required the application of California law to all disputes. Consequently, CEO filed separate actions in California against Internet Retailer, and certain of its related entities, to recover his stock; ultimately, those matters were consolidated and sent to arbitration along with Internet Retailer's initial claim for breach of the noncompetition agreement and to void the vested stock options. In arbitration, Internet Retailer's claim for breach of the noncompetition survived summary judgment challenges even though:

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•

Internet Retailer acknowledged that CEO had never provided the supposed competitor with any non-public, confidential or proprietary information of ISN;

•

CEO introduced evidence that CEO had informed Internet Retailer of his intention to join the alleged competitor's Board of Directors, and had received no negative feedback;

•

Internet Retailer and the alleged competitor occupied entirely different niches of the online retailing world, earned revenue through entirely different means, and had actually explored complementary business relationships;

Two additional facts are important. First, Internet Retailer filed its , claims against CEO contemporaneously with a stock valuation it received in connection with a possible acquisition of the business. The evidence suggested that Internet Retailer, upon receiving the valuation, simply did not want to provide CEO, and several other former employees, with their stock - which was potentially worth millions of dollars. Secondly, Internet Retailer never took steps actually to enforce the non-competition agreement; that is, it never sought an injunction or claimed damages as a result of the alleged breach. The non-compete claims were filed solely because of perceived economic value to the Parent in preventing CEO from exercising his vested stock options - not because of any "competitive" concerns. This case thus provides a stark example of how non-competition agreements may naturally be used offensively, without any basis, to hamstring an employee for years and, even more distressingly, for reasons entirely unrelated to the claimed justifications for "non-competition" agreements - i.e., the loss of valuable "human capital." B.

Various Venture Capital Entities v. High Tech Company

Founder 8

In this case, Founder owned approximately ten percent of Company A's stock and served as Company A's president and chairman of its board of directors. Company A was a California business, and Founder was a California resident. After two rounds of financing, Company A's venture capital backers sought to oust Founder from his position as president and his position on the board. In furtherance of those objectives, the venture capitalists then sued Founder for allegedly starting a "competing" business ("Company B") and disclosing trade secrets - notwithstanding the fact that the evidence showed that: i) Founder had obtained approval for his involvement in Company B; ii) Company B was not engaged in the development or manufacturing of technology competitive with Company A; iii) Company A's venture capital backers themselves held positions on the boards of companies that they acknowledged were competitive with Company A; and iv) Company A could never articulate with specificity exactly what trade secrets had supposedly been disclosed, as required by the Code of Civil Procedure. Company A had no actual reason to sue for protection of its trade secrets, and the non-competition agreement was of the sort that numerous California courts have deemed void. Thus, despite generally unfavorable law concerning employee non-competition agreements, Company characterizing the covenant as a "narrow restraint" - still conjured a lawsuit against Founder. Notwithstanding pleading and substantive legal protections, the employers in each of these cases were able to hamstring former employees with costly legal proceedings for months or years. This is not unusual; what

was unusual was that these employees had the means to take on well-heeled employers. Faced with threats regarding their purported non-compete agreements, many employees choose not to fight, and instead elect to seek 9

other employment options that they believe will not draw the attention of a former employer. And the Court should hardly expect aggressive use of "narrow restraint" exceptions to non-competition agreements to be applied just to upper management executives; employers use such agreements as cudgels against all levels of employees, particularly in circumstances where mass defections occur from one employer to another. Under Andersen's interpretation of Section 16600 and related case law, examples like these will only grow in number. Andersen claims that companies need Section 16600 to protect their "human capital" (OB 5), as though employees were fungible goods to be accumulated or hoarded. The metaphor is telling. As applied in practice, this ideology typically amounts, in our experience, to little more than a euphemism for attempted "indentured servitude." Such a notion is abhorrent to California law for good reason - it stifles employee mobility and competition among employers for the best talent. Andersen's position also fails to recognize that employers frequently try to have it both ways with respect to employee mobility. On the one hand, employers enjoy the benefits of being able to discharge employees "at will," and inevitably seek maximum flexibility to recruit employees from competitors. On the other hand, however, Andersen's reading of Section 16600 would grant employers, through the use of restrictive covenants, the ability to control where, how, and when employees may subsequently seek employment through purported "narrowly tailored" noncompetes. To apply such unwritten exceptions to Section 16600 would dramatically tip the power in employment relationships towards the employer - absent any legislative fact-finding or statutory basis for doing so. Indeed, the existing exceptions to Section 16600 - concerning, for example, the sale of a business, partners selling their partnership interests 10

are there for good reason: to protect a buyer's investment in the value of a business's goodwill following its purchase. In other words, if an employee sells a business he owns, the buyer can reasonably expect to enforce a noncompetition agreement so that he need not find himself effectively competing with what he presumably just purchased. Likewise, the separate body of case law concerning trade secrets has effectively established an "exception" to the general prohibition on employee non-competition agreements. California law rightly deems it "unlawful", and thus outside the scope of Section 16600, for an employee to misappropriate trade secrets from a former employer. Moreover, under the existing separate statutory schemes of Section 16600 and the Uniform Trade Secrets Act, California law has developed more than enough checks and balances necessary to insure that employers do not lose what it is they claim to be most concerned about - the improper release of sensitive information like trade secrets - while securing the rights of individuals to seek work as they choose. II.

THE COURT SHOULD CLARIFY THAT A GENERAL RELEASE OF "ANY AND ALL CLAIMS" BETWEEN AND EMPLOYER AND EMPLOYEE VIOLATES CALIFORNIA LAW TO THE EXTENT THE EMPLOYER ATTEMPTS CONTRACTUALLY TO RID ITSELF OF ITS STATUTORY INDEMNIFICATION OBLIGATIONS

Andersen suggests that a litany of terrible consequences will result if the Court finds that Andersen's attempt to have Edwards release "any and all claims" as a condition of future employment with HSBC violated the law. The only thing that will happen is that the Court will have made clear that what employers often try to do in separation agreements-

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contractually run from indemnification as prescribed by the Labor Code § 2802 - is, in fact, illegal. Employers often make clear amid separation and release negotiations that they will not - in exchange for the release - provide indemnification for issues arising out of the former employee's employment, notwithstanding the requirements of Labor Code § 2802. Where, as here, a departing employee may unwittingly be brought back into criminal or other legal proceedings, this is obviously of real import to the employee - often worth more than severance or other settlement monies. Good drafting can, and will, mitigate any confusion that might result from such broad releases. For example, language may simply be included in a proposed settlement and release, noting that nothing in the release is intended to release claims for "indemnification the employee may have, as provided by statute, company bylaws, or pursuant to any policy of insurance." Nothing more is required; such drafting brings a release in line with express statutory law. The lower court's decision correctly recognized that, to the extent an employer seeks to foist such broad contractual release language on an employee, it runs afoul of statutory requirements.

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CONCLUSION

For the foregoing reasons, and the reasons set forth in Edwards' Answering Brief, the Court should affirm the lower court's ruling that Section 16600 does not permit employee non-competition agreements, nor does it allow "narrow restraints" on them. In addition, the Court should affirm that broad releases of "any and all claims' run afoul of Labor Code section 2802 insofar as they are intended to release statutory rights to indemnification.

Dated: May 14, 2007

Respectfully submitted,

KASTNERBANCHEROLLP

Scott R. Raber

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CERTIFICATE OF COMPLIANCE Pursuant to California Rules of Court, rule 8.204(c)(1), the attached Amicus Brief of Kastner Banchero was produced using 13-point Times New Roman type style and contains 2,971 words not including the tables of contents and authorities, caption page, signature blocks, or this Certification page, as counted by the word processing program used to generate it.

Dated: May 14,2007

KASTNERBANCHEROLLP

BY~ Slott . Raber

Amicus Curiae

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PROOF OF SERVICE

I am over eighteen years of age, not a party to this case and am employed in the county of San Francisco. My business address is 20 California Street, Floor Seven, San Francisco, California 94111, and I am readily familiar with the firm's business practice for collection and processing of correspondence for mailing with the United States Postal Service. On Monday, May 14,2007, in the ordinary course of business, I served the attached AMICUS CURIAE BRIEF by placing a true copy thereof in a sealed envelope with first class postage affixed, in a U.S. Mail box, addressed as follows:

SEE ATTACHED LIST

I certify under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed in San Francisco, California on May 14,2007

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SERVICE LIST LAW OFFICES OF RICHARD A. LOVE Richard A. Love 11601 Wilshire Blvd., Shjueti 200 Los Angeles California

GREINES, MARTIN, STEIN & RICHLAND LLP Marc 1. Post 5700 Wilshire Blvd., Suite 375 Los Angeles, California 90036-3625

Wayne S. Flick, Esq. Yury Kapgan, Esq. Latham & Watkins LL:P 633 West Fifth St., Suite 4000 Los Angeles, CA 90071-2007

Kristine 1. Wilkes, Esq. Colleen C. Smith, Esq. Shireen M. Becker, Esq. Latham & Watkins 6000 West Broadway, Suite 1800 San Diego, CA 92101-3375

Shareen A. McFadden Arthur Anderson LLP 33 West Monroe St., Floor 18 Chicago, IL 60603-5385 Attorneys for Defendant Arthur Anderson LLP

Honrable Andria K. Richey Los Angeles Superior Court 111 North Hill St. Los Angeles, CA 90012

Office of the Clerk Court of Appeal; Second Appellate District, Div. 3 300 South Spring St. Second Floor, North Tower Los Angeles, CA 90013-1233

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