Amicus Brief St Jude Supporting Edwards

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Case No.: S147190

IN THE SUPREME COURT OF CALIFORNIA RAYMOND EDWARDS II, Plaintiffand Appellant, vs.

ARTHUR ANDERSEN, LLP, Defendant and Respondent.

After a Decision by the Court of Appeal Second Appellate District, Division Three, Case No. B178246 Los Angeles Superior Court Case No. BC 294853 Honorable Andria K. Richey

APPLICATION OF ST. JUDE MEDICAL, S.C., INC., PACESETTER, INC. AND ADVANCED BIONICS CORPORATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF AND AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT RAYMOND EDWARDS II

FELDMAN GALE, P.A. James A. Gale (FL Bar No. 371726) Todd M. Malynn (CA Bar No. 181595) Michael J. Weber (FL Bar No.: 918570) 880 West First Street, Suite 315 Los Angeles, California 90012 Telephone: 213-625-5992 Facsimile: 213-625-5993 Attorneys for Amicus Curiae St. Jude Medical, S.C., Inc., Pacesetter, Inc. and Advanced Bionics Corporation

Case No.: S147190

IN THE SUPREME COURT OF CALIFORNIA RAYMOND EDWARDS II, Plaintiffand Appellant, vs.

ARTHUR ANDERSEN, LLP, Defendant and Respondent.

After a Decision by the Court of Appeal Second Appellate District, Division Three, Case No. B178246 Los Angeles Superior Court Case No. BC 294853 Honorable Andria K. Richey

APPLICATION OF ST. JUDE MEDICAL, S.C., INC., PACESETTER, INC. AND ADVANCED BIONICS CORP. FOR LEAVE TO FILE AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT RAYMOND EDWARDS II

FELDMAN GALE, P.A. James A. Gale (FL Bar No. 371726) Todd M. Malynn (CA Bar No. 181595) Michael J. Weber (FL Bar No.: 918570) 880 West First Street, Suite 315 Los Angeles, California 90012 Telephone: 213-625-5992 Facsimile: 213-625-5993 Attorneys for Amicus Curiae St. Jude Medical, S.C., Inc., Pacesetter, Inc. and Advanced Bionics Corporation

1

TO THE HONORABLE CHIEF JUSTICE RONALD M. GEORGE AND HONORABLE ASSOCIATE JUSTICES: St. Jude Medical, S.C., Inc. ("St. Jude"), Pacesetter, Inc. ("Pacesetter") and Advanced Bionics Corporation ("Advanced Bionics") respectfully request permission to file a brief as amicus curiae in support of plaintiff and respondent Raymond Edwards II and the decision of the California Court of Appeal, Second Appellate District, Division Three, rejecting the Ninth Circuit Court of Appeals' interpretation of Business and Professions Code section 16600 ("Section 16600"). The proposed Amicus Curiae Brief is combined with and accompanies this Application, and addresses the following important issue of California law, which has remained unsettled since the Supreme Court's decision in Muggill v. Reuben H Donnelley Corp. (1965) 62 Ca1.2d 239:

Whether there are and should be any judicially created exceptions to the Legislature's statutory scheme regulating contracts in restraint o/trade. The Identity of Amicus Curiae

St. Jude, Pacesetter and Advanced Bionics (collectively, the "Amicus Curiae") are companies that conduct substantial business in California - researching, manufacturing, selling and!or supporting the sales of implantable medical devices. They employ over 3,000 residents in California. Pacesetter's principal place of business is Sylmar, California. St. Jude's western regional office is located in Sylmar, California. Advanced Bionics' principal place of business is in the neighboring city of Santa Clarita, California. The Interests of the Amicus Curiae

The Amicus Curiae follow long-standing and previously well-settled law and embrace the public policy embodied in Section 16600 and the 1

fundamental right of all Californians to engage in a profession, trade or business of their choosing, which is protected by that statue. To that end,

the Amicus Curiae do not use contractual restraints in their California employment agreements, even though they might employ such restraints in other jurisdictions where contractual restraints are both legal and enforceable. Given the current state of the law, however, the Amicus Curiae's decision not to use contractual restraints in this State puts them at a distinct and increasing competitive disadvantage. Other companies may freely recruit and hire the Amicus Curiae's employees in California without any concern about contractual restraints and without incurring the often substantial costs involved in litigating over the validity of such restraints. Unlike the Amicus Curiae, there are other companies doing substantial business in California that - whether due to confusion or malicious intent - routinely insert restraints on competition in their California employment agreements. Should the Amicus Curiae desire to recruit an employee who has signed such an agreement, they are faced with the threat, and the corresponding effort and expense, of litigating over the validity and enforceability of the restraints. In most cases, the cost of litigation far exceeds the salary of the recruited employee. 1 The only way For example, between April and June 2005, St. Jude and Pacesetter hired three mid-level employees, who were long-standing residents of California (Deana Dowell, Steven Chapman and Claudio Plaza). St. Jude hired Dowell and Chapman to work in Northern and Southern California, respectively, selling St. Jude products. Pacesetter hired Plaza to work in Sylmar, California, where Pacesetter manufactures St. Jude products. Shortly thereafter, St. Jude Medical, Inc., the parent corporation of St. Jude and Pacesetter, received a letter from Biosense Webster, Inc. ("Biosense"), the California company that previously employed Dowell, Chapman and Plaza. The letter threatened to enforce covenants not to compete in a fonn employment agreement that 2

to avoid this expense is to forego hiring employees who have signed contractual restraints on competition. Either way - whether the Amicus Curiae follow the law or succumb to its violation by competitors - the Amicus Curiae lose. They either incur a higher cost of employment than that of their less scrupulous competitors, or forego the opportunity to hire the person best suited for the job at hand. 2 The interest of the Amicus Curiae is simple: they want a level playing

field, and that requires certainty in the law. The Court can restore a level playing field and greatly reduce the cost of hiring talented individuals in California by making clear that there are no "exceptions" to Section 16600 beyond those provided by the Legislature (Bus. & Prof. Code §§ 16601, 16602, 16602.5). The Court Biosense attached to the letter - a form agreement that Dowell and Chapman were required to sign as a condition of employment in California (plaza had a different non-competition agreement). In July 2005, St. Jude and Pacesetter filed a complaint for declaratory relief and unfair competition and obtained an anti-suit temporary restraining order ("anti-suit TRO") prohibiting Biosense from commencing litigation in a foreign jurisdiction to restrain competition in California. The Court ofAppeal, Second Appellate District, issued a writ of mandate vacating the anti-suit TRO. (See Biosense Webster, Inc. v. Superior th Court (2006) 135 Cal.AppA 827,830 [citingAdvancedBionics Corp. v. Medtronic, Inc. (2002) 29 CalAth 697].) In March 2007, nearly two years later, St. Jude and Pacesetter prevailed on a motion for summary adjudication that the non-competition agreements signed by Dowell and Chapman were void and "illegal" contracts under Section 16600. However, to obtain this adjudication, St. Jude and Pacesetter had to incur substantial litigation expenses - well in excess of $500,000 - in defending against both the actual and inherent threat of litigation posed by Biosense's illegal contracts, and in prosecuting their claim for unfair competition in an effort to level the playing field.

In addition, confusion in the law plainly discriminates against the hiring of lower-level and mid-level employees in particular industries, as it becomes increasingly too expensive to hire such employees in any competitive capacity in California. Only high or executive level employees will eventually be able to avail themselves ofthe fundament right protected by Section 16600. 2

3

should further declare that any contractual restraint in an employment agreement that does not, on its face, fall within one of the enumerated statutory exceptions is illegal per se, and that its use constitutes an unlawful trade practice. (See People v. McKale (1979) 25 Cal.3d 626,635; D'Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927,933; Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881,908.) Should the Court detennine that there are non-statutory "exceptions" to Section 16600, and depart from prior Supreme Court precedent (see, e.g., Chamberlain v. Augustine (1916) 172 Cal. 285, 288-289, Continental CarNa-Var Corp. v. Moseley (1944) 24 Cal.2d 104, 110, New Method Laundry Co. v. MacCann (1916) 174 Cal. 26, 31, Carpet-Beating, etc, Works v. Jones (1894) 102 Cal. 506, 511, Howard v. Babcock (1993) 6 Cal.4th 409, 416), the Amicus Curiae will simply level the playing field for themselves. They and others will be forced to change their current practice and use the same contractual restraints that others are currently using in this State, notwithstanding Section l6600's clear language and the Legislature's plain intent when it enacted that statute. How the Proposed Brief Will Assist the Court The Amicus Curiae represent a point of view not presently before the Court. Appellant Raymond Edwards II, a California resident, provides the point of view of a California employee who is seeking to lawfully pursue a profession, trade or business of his choosing. Respondent Arthur Andersen LLP, a company domg business in California, provides the point of view of a California employer who is trying to restrain lawful competition by contract and justify a business practice that has been declared unlawful by California courts. The Amicus Curiae provide the point of view of a California employer who complies with the law and 4

public policy of this State, and who does not use contractual restraints on competition in their California employment contracts. The Amicus Curiae do not support the position being advocated by Respondent for two reasons: (1) "naked" restraints on competition, whetherpartial or total, have been outlawed in California since 1872; and (2) no restraint on lawful competition can be justified under Section 16600. Contractual restraints are not "necessary" to protect trade secrets (the Amicus Curiae's trade secrets and confidential information are adequately protected by California law), nor can they be "narrowly tailored" to prevent the in terrorem effect that is inherent in contractual restraints, and that directly undermines California's public policy of free competition and employee mobility, which benefits all Californians. The proposed Amicus Curiae Brief will assist the Court by laying the historical, political and legal underpinnings of California's first antitrust law (Bus. & Prof. Code § 16600), and by discussing relevant Supreme Court and Ninth Circuit precedent. One objective is to inform the Court where both the Ninth Circuit Court of Appeals, and this Court, lost sight of Section 16600's bright-line rule and the Legislature's public policy decision in favor of free competition and employee mobility, and erroneously created non-statutory exceptions to Section 16600 that result in the very anti-competitive conduct that the Legislature and prior precedent of this Court sought to prevent. The second objective is to support a rule that both restores California's policy of free competition and employee mobility, and ensures an even playing field among companies doing business in California. The Court in Chamberlain v. Augustine set forth what the Amicus Curiae believe is the appropriate and operative standard for determining whether a 5

contract runs afoul of Section 16600's prohibition. Contractual provisions are void if, by enforcing them, the employee "is not as free to [engage in a competing business] as he would have been if he were not bound by it." (172 Cal. at 289 [emphasis added].) Under Chamberlain v. Augustine, and for the reasons set forth in the attached Amicus Curiae Brief, the Court should articulate a bright-line-rule against post-employment restraints on competition that: •

Re-affrnns that California employees have the right to compete against their former employers and that this right is absolute so long as the competition is conducted lawfully.

•

Re-affrnns that Section 16600 prohibits "partial" as well as "complete" restraints on competition (and thereby overrule the Ninth Circuit's "narrow restraint" doctrine).

•

Plainly states that contractual restraints in employment agreements are never "necessary" and cannot effectively be "narrowly tailored" to protect the rights of employers that are already protected by other laws (and thereby clarify or overrule the so-called "trade secret exception").

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Recognizes that the mere inclusion of restraints on competition in employment agreements is anticompetitive, as it results in de facto compliance in many if not most cases, even where the restraints are patently unlawful.

•

Concludes that all restraints on competition in employment contracts, including employee noncompetition agreements and customer non-solicitation provisions, are void under Section 16600' s bright-line rule and that their use in California employment agreements constitutes unlawful competition and subjects the employer to liability.

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For the foregoing reasons, the Amicus Curiae St. Jude, Pacesetter and Advanced Bionics respectfully request that the Court enter an order granting their Application to file the attached Amicus Curiae Brief. Dated: May 14, 2007

Respectfully submitted, FELDMAN GALE P.A. JAMES A. GALE TODD M. MALYNN MICHAEL 1. WEBER ~-

BY:~ Todd M. Malynn Attorneys for Amicus Curiae

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Case No.: S147190

IN THE SUPREME COURT OF CALIFORNIA RAYMOND EDWARDS II, Plaintiffand Appellant, vs.

ARTHUR ANDERSEN, LLP, Defendant and Respondent.

After a Decision by the Court of Appeal Second Appellate District, Division Three, Case No. B178246 Los Angeles Superior Court Case No. BC 294853 Honorable Andria K. Richey

AMICUS CURIAE BRIEF OF ST. JUDE MEDICAL, S.C., INC., PACESETTER, INC. AND ADVANCED BIONICS CORP~ IN SUPPORT OF APPELLANT RAYMOND EDWARDS II

FELDMAN GALE, P.A. James A. Gale (FL Bar No. 371726) Todd M. Malynn (CA Bar No. 181595) Michael J. Weber (FL Bar No.: 918570) 880 West First Street, Suite 315 Los Angeles, California 90012 Telephone: 213-625-5992 Facsimile: 213-625-5993 Attorneys for Amicus Curiae St. Jude Medical, S.C., Inc., Pacesetter, Inc. and Advanced Bionics Corporation

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TABLE OF CONTENTS

I.

INTRODUCTION

1

II.

ARGUMENT

3

A.

THE LEGISLATURE HAS MADE A BINDING POLICY CHOICE IN FAVOR OF FREE COMPETITION AND AGAINST EMPLOYEE NON-COMPETITION AGREEMENTS

3

1.

California's First Antitrust Law

3

2.

Section 16600 Was Meant To Absolutely Bar Contractual Restraints In Employment Contracts

4

Section 16600 Embodies The Legislature's Policy Choice In Favor Of Free Competition And Employee Mobility Over The Competitive Interests Of The Employer

5

The Benefits Of The Legislature's Policy Choice Transcend The Individual Interests Of Employers Or Employees

6

Section 16600 Works

8

3.

4.

5. B.

FEDERAL AND STATE COURTS HAVE LOST SIGHT OF THE LEGISLATURE'S POLICY CHOICE AND HAVE CREATED CONTRADICTIONS IN THE LAW 1.

2.

The Legislature's Sound Policy Choice Is Implemented By Section 16600's Bright-Line Rule Against Contractual Restraints The Ninth Circuit's "Partial Restraint" Exception (a)

(b)

9

9 10

The "Partial Restraint" Doctrine is Contrary to California Law

.13

Insofar as the Ninth Circuit's "Partial Restraint" Doctrine is Premised on Prior California Decisions, Those Decisions Should be Clarified or Overruled

16

1

Page 3.

The So-Called "Trade Secret" Exception (a)

(b)

(c)

(d)

C.

III.

18

Contractual Restraints are Never "Necessary" to Protect an Employer's Rights

20

Pure Non-Competition Clauses Should be Declared Illegal Per Se Because They are Unnecessary and, by Definition, Not Narrowly Tailored to Protect an Employer's Legal Rights

22

Restraints on Soliciting Customers Should be Declared Illegal Per Se Because They are Unnecessary to Protect an Employer's Legal Rights and Cannot Be Narrowly Tailored to Protect Those Rights

23

An "Exception" for Customer Non-Solicitation Clauses to Protect Confidential Customer List Invites Abuse and Creates an In Terrorem Effect that Undermines the Important Public Policy and Fundamental Rights Section 16600 was Designed to Protect .......26

THE COURT SHOULD VINDICATE THE FUNDAMENTAL RIGHT PROTECTED BY SECTION 16600 AND ENSURE AN EVEN PLAYING FIELD

28

1.

The Proposed Solution

28

2.

Benefits of the Proposed Solution

28

CONCLUSION

30

CERTIFICATE OF WORD COUNT

11

31

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TABLE OF AUTHORITIES

Page(s)

Cases American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 CaLApp.3d 1318 Application Group, Inc. v. !lnunter Group, Inc. (1998) 61 CaLAppAt 881 Armendariz v. Foundat~on Health Psychcare Services, Inc. t (2000) 24 CaL4 83 Avocado Sales Co. v. Wyse (1932) 122 CaLApp. 627

26 6, 7, 27 3 n.5, 15 26

Bosley Medical Group v. Abramson (1984) 161 CaLApp.3d 284

10 n.11, 15

Boughton v. Socony Mobil Oil Co. (1964) 231 CaLApp.2d 188

16, 19 n.17

Campbellthv. Board ofTrustees ofLeland Stanford Junior Univ. (9 Cir. 1987) 817 F.2d 499 Chamberlain v. Augustine (1916) 172 CaL 285

10-11, 16

passim

Cianci v. Superior Court (1985) 40 CaL3d 903

7

City Carpet-Beating, etc, Works v. Jones (1894) 102 CaL 506

10,27,29

Continental Car-Na- Var Corp. v. Moseley (1944) 24 CaL2d 104

passim

Davis v. {ointless Fire Brick Co. t (9 Cir. 1924) 300

10 n.12

Diodes, Inc. v. Franzen (1968) 260 CaLApp.2d 244

6

D'Sa v. Playhut, Inc. h (2000) 85 CaL App. 4t 927

23, 26

Empire Steam Laundry v. Lozier (1913) 165 CaL 95

20

Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1971) 20 CaLApp.3d 668

111

12 n.15

Page(s) Fortna v. Martin (1958) 158 Cal.App.2d 634

26

General Commercial Packaging, Inc. v.'[PS Package Eng'g, Inc. (9 t Cir. 1997) 126 F.3d 1131

11, 17

Golden State Linen Service, Inc. v. Vidalin (1977) 69 Cal.App.3d 1..

14, 19 n.17

Gordon v. Landau (1958) 49 Cal.2d 690

18-19

Great Western etc. v. J.A. Wathen D. Co. (1937) 10 Cal.2d 442

19 n.18

Grogan v. Shaffee (1909) 156 Cal. 611

17, 19 n.18

Hill Medical Corp. v. Wyc~.([ (2001) 86 Cal.AppA 895

10 n.ll, 15

Hollings~orth

Solderless Terminal Co. v. Turley (9 t Cir. 1980) 622 F.2d 1324 11 n.13, 19 n.19, 21 n.20, 25

Int'l Bus.thMach. Corp. v. Bajorek (9 Cir. 1999) 191 F.3d 1033

11-12, 15

Howard v. Babcock (1993) 6 Cal.4th 409

10 n.11

Kolani v. Gluska (1998) 64 Cal.AppAth 402

19 n.16, 26

KGB, Inc. v. Giannoulas (1980) 104 Cal.App.3d 844

10

King v. Gerold (1964) 231 Cal.App.2d 316

19 n.17

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

19 n.16 & n.19, 24-25

Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268

24

Mathews Paint Co. v. Seaside Paint & Lacquer Co. (1957) 148 Cal.App.2d 168

26

Metro Traffic Control, Inc. th v. Shadow Traffic Network (1994) 22 Cal.AppA 853 Monogram Industries, Inc. v. Star Industries, Inc. (1976) 64 Cal.App.3d 692 Morey v. Paladini (1922) 187 Cal. 727 Morlife, Inc. v. Perry (1997) 56 Cal.AppAth 1514

IV

passim 4 n.7 13 3 n.2, 21

Page(s) Morris v. Harris (1954) 127 Cal.App.2d 476 Moss, Adams & Co. v. Shilling (1986) 179 Cal.App.3d 124

13-14 19

Muggill v. Reuben H Donnelley Corp. (1965) 62 Cal.2d 239

12 & n.15, 18, 19 n.18

New Method Laundry Co. v. MacCann (1916) 174 Cal. 26

4 n.6, 7

Scott v. Snelling and Snelling, Inc. (N.D. Cal. 1990) 732 F. Supp. 1034

10 n.12

Swenson v. File (1970) 3 Cal.3d 389

7

Thompson v. Impaxx, Inc. th (2003) 113 Cal.AppA 1425

19, 24-25

Weber, Lipshie & Co. v. Christian (1997) 52 Cal.AppAth 645

3 n.5, 15

Statutes Business & Professions Code § 16600

passim

§ 16601

5

§ 16602

5

§ 16600.5

5

§§ 16700 et seq

3 n.l

§§ 17200 et seq

20

Civil Code

§ 1668

3 n.5, 14

§ 1673

1, 3-5

§ 1674

5

§ 1675

5

§ 3513

3 n.5, 15

§§ 3426 et seq

20 v

Page(s) Other Authorities

Blake, Employee Agreements Not To Compete (1960) 73 HVLR 625 Code Commission, Civ. Code § 1673 c0111ment

4 n.7, n.8 & n.9 6-7

Ronald 1. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete (1999) 74 N.Y.U.L. Rev. 575

8 nolO

Gilson, Amicus Curiae Brief filed in Advf!nced Bionics Corp. v. Medtronic, Inc. (2002) 29 Ca1.4 t 697

8,22 n.21

Marx, Deborah Stumsky & Lee Fleming, Noncompetes and Inventor Mobility: Specialists, Stars, and the Michigan Experiment

http://www.hbs.edu/research/pdf/07-042.pdf

9

Von Kalinkowski & Hanson, The California Antitrust Laws: A Comparison With Federal Antitrust Laws,

(1959) 6 UCLA L. Rev. 533

3 n.1

VI

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I. INTRODUCTION For well over a century, Business and Professions Code section 16600 (and its predecessor, Civ. Code § 1673) has defined and protected the fundamental right of all Californians to pursue the profession, trade or business of their choice, unfetter~d by contractual restraints on competition. The statute reflects the Legislature's decision to elevate an employee's interest in career mobility and personal betterment over the competitive interests of his former employer. The intent of the statute is not merely to protect individual rights. Section 16600 reflects an important public policy guaranteeing that California's labor pool will be put to its best and highest use, and that consumers will have access to the full array of goods and services that an open, competitive market provides. The Legislature's sound policy decision is routinely cited as a major factor contributing to the unparalleled success of California's economy. Over time, however, the public policy and the fundamental rights embodied in Section 16600 have been eroded by judicially created "exceptions." In particular, the "partial restraint" doctrine espoused by the Ninth Circuit Court of Appeals, and the so-called "trade secret exception" referred to in decisions by this Court and other state courts, have spawned much needless litigation as to whether certain contractual restraints on competition are enforceable. The creation of these "exceptions" to Section 16600's otherwise bright-line rule against contractual restraints has the effect of encouraging their use, rather than eliminating them as the Legislature intended. Today, employers ignore their legal obligations by including broad, anticompetitive restraints in California employment agreements, knowing 1

that few employees or prospective employers will challenge them. If the restraints are challenged, the employers simply invoke one of the judicially created exceptions and litigate over its application. While the restraints are struck down in the overwhelming majority of cases, the message is clear: "It will cost you substantial time and money to secure the rights Section 16600 was intended to protect." The uncertainties created by these "exceptions" thus give rise to what one court called the "in terrorem effect" that enables employers to both benefit from de facto compliance with the precise type of contractual restraints that Section 16600 was supposed to eliminate, and obtain an advantage over their competitors in California who comply with the law. It is time for this Court to remove the uncertainties and restore the

balance struck by the Legislature when it enacted Section 16600 over a century ago. Under settled law and public policy of California, there is no place for restraints on competition in employment agreements. There are no statutory exceptions, and should be no judicially created exceptions, authorizing their use in California. Employers who would use or attempt to enforce such contractual restraints should not be encouraged; they should be deterred.

2

II. ARGUMENT A.

THE LEGISLATURE HAS MADE A BINDING POLICY CHOICE IN FAVOR OF FREE COMPETITION AND AGAINST EMPLOYEE NON-COMPETITION AGREEMENTS

1.

California's First Antitrust Law.

Business and Professions Code section 16600 is California's first antitrust law. 1 It was originally enacted in 1872 as Civil Code section 1673. It has remained virtually unchanged for more than 135 years.

Since the enactment ofthis statute, California courts have consistently held that Section 16600 broadly protects "one ofthe most cherished commercial rights we possess" - "the important legal right ofpersons to engage in businesses and occupations oftheir choosing.,,2 Section 16600 ensures that "every citizen shall retain the right to pursue any lawful employment and enterprise oftheir choice.,,3 It provides every Californian with a form ofimmutable "property right,,,4 one that cannot be waived by contract,5 and one that should be "zealously" guarded by the courts. 6

Until the 1907 enactment ofthe Cartwright Act (Bus. & Prof. Code §§ 16700 et seq.), Section 16600 was California's only antitrust law. (See Von Kalinkowski & Hanson, The California Antitrust Laws: A Comparison With Federal Antitrust Laws, (1959) 6 UCLA L. Rev. 533, 540 & n.50.) 1

2 Morlife, Inc. v. Perry (1997) 56 CaLAppAth 1514, 1520. 3

Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22

CaLAppAth 853, 859. 4 Continental Car-Na-Var Corp. v. Moseley (1944) 24 CaL2d 104, 110 ["Every individual possesses as a form ofproperty, the right to pursue any calling, business or profession he may choose."]. 5 See Civ. Code §§ 1668, 3513; Armendariz v. FoundationHealthPsychcare Services, Inc. (2000) 24 CalAth 83, 100-101; Weber, Lipshie & Co. v. Christian

(1997) 52 Cal.AppAth 645,659. 3

2.

Section 16600 Was Meant To Absolutely Bar Contractual Restraints In Employment Contracts.

Historically, courts have dealt with contractual restraints on competition in two distinct contexts: restraints in employment agreements; and restraints associated with the sale of a business and its goodwill. 7 In the earliest reported decisions, contractual restraints in employment agreements were always found to be void without regard to their scope or duration. 8 In contrast, subsequent cases dealing with restraints in contracts for the sale or transfer of a business were upheld if "reasonable.,,9 The distinction is significant given the statutory scheme chosen by the . Code Commission, and adopted by the Legislature, back in 1872. Civil Code section 1673 - the direct predecessor to Section 16600 - speaks in sweeping terms and provides that "Every contract by which anyone is restrained from exercising a lawful profession, trade or business of any kind, otherwise than is 6

New Method Laundry Co. v. MacCann (1916) 174 Cal. 26, 31 ["This right

of a citizen to pursue any calling, business, or profession he may choose is a property right to be guarded by equity as zealously as any other form of property."]. 7

See, e.g., Monogram Industries, Inc. v. Star Industries, Inc. (1976) 64

CaLAppJd 692, 697 [contractual restraints on competition have their "genesis in either an employer-employee relationship, or in the sale ofthe 'goodwill' of a business"]; see also Blake, Employee Agreements Not To Compete (1960) 73 HVLR 625, 631-637 [discussing distinction, dating back to fifteenth century English court decision in the Dyer's case, between "restraints incident to the sale or transfer of a business" and restraints in agreements between masters and either journeymen or apprentices]. 8

See Blake, Employee Agreements Not To Compete, supra, 73 HVLR at pp.

631-632 ["These are the cases always cited in support ofthe proposition that originally the common law regarded all restraints as departures from the principle of economic freedom and therefore void."]. Id. at 629-631 [discussing the oft-cited, eighteenth century English decision in Mitchel v. Reynolds, which upheld a contractual restraint on competition in 9

the sale of a bakery business.]. 4

provided by the next two sections, is to that extent void." The "next two sections," sections 1674 and 1675, deal respectively with the sale of "the goodwill of a business" and the rights ofpartners upon the dissolution of a partnership. Both "exceptions" relate to the sale or transfer of goodwill; neither addresses contractual restraints in an employment agreement. With the enactment ofthe Business and Professions Code in 1941, the sweeping prohibitions in Civil Code section 1673 were adopted virtually verbatim in what we know today as Section 16600. Similarly, Sections 16601 and 16602 incorporated the same two exceptions provided in the initial legislation. Since that time, the only pertinent change was the addition, in 1994, of Section 16602.5, which essentially replicates the partnership provisions of Section 16602 for limited liability companies in recognition of more modem fonTIS ofbusiness organization. There are two conclusions about Section 16600 that flow ineluctably from this historical overview. First, given that contractual restraints historically fell into one oftwo categories - restraints attendant to the sale of a business, and restraints in employment agreements - by limiting the statutory exceptions to the former category the Legislature made clear that Section 16600's broad prohibitions apply with particular force to restraints in employment agreements. Second, there are no exceptions to Section 16600 authorizing restraints in employment agreements. 3.

Section 16600 Embodies The Legislature's Policy Choice In Favor Of Free Competition And Employee Mobility Over The Competitive Interests Of The Employer.

California courts have repeatedly affmned that Section 16600 establishes a definitive ordering of competitive interests: "The interests of the employee in his own mobility and betterment are deemed paramount to

5

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the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change." (Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244,255; Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.AppAth 881, 900; Metro Traffic Control, Inc. v. Shadow Traffic Network, supra, 22 Cal.AppAth at pp. 859-860.) To effectuate this ordering ofinterests, Section 16600 creates a brightline rule that flatly bars employers from using restraints on competition in employment contracts. To the extent they need protection from unfair competition, employers may avail themselves oflaws intended to protect their rights, but they may not resort to the expedient of contractual restraints: Equity will to the fullest extent protect the property rights of employers in their trade secrets and otherwise, but public policy and natural justice require that equity should also be solicitous for the right inherent in all people, not fettered by negative covenants upon their part to the contrary, to follow any of the common occupations of life. . . . A former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for business of those who had formerly been the customers of his fonner employer, provided such - competition is fairly and legally conducted. (Continental Car-Na-Var Corp. v. Moseley, supra, 24 Cal.2d at p. 110.)

4.

The Benefits Of The Legislature's Policy Choice Transcend The Individual Interests Of Employers Or Employees.

Section 16600's bright-line prohibition against contractual restraints in employment agreements results in benefits that extend far beyond the rights of individual workers. Indeed, both the legislative history and the pronouncements of this Court recognize that Section 16600 was enacted for the benefit of all the citizens of this state. (See, e.g., Civ. Code § 1673

6

(1872) Code Commission comment ["[Contractual restraints on competition] manifestly tend[] to enforce ideleness, and deprive[} the State ofthe services afits citizens."]; Swenson v. File (1970) 3 Cal.3d 389,394 [Section 16600's prohibition against contractual restraints is "not based upon any consideration for the party against whom the relief is sought, but upon considerations of sound public policy. "'] [citation omitted].) Section 16600, like the Cartwright Act, rests "'on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.'" (Cianci v. Superior Court (1985) 40 Cal.3d 903,918 [citation omitted].) Additionally, "constitutional guaranties of liberty include the privilege of every citizen to freely select the tradesman to whom he may desire to extend his patronage, and equity cannot invade or take away this right, either directly or indirectly." (New Method Laundry Co. v. MacCann, supra, 174 Cal. at p. 32.) Section 16600 vindicates this fundamental liberty by removing restraints on open competition, thus ensuring that consumers will have access to all the goods and services, and to all the providers of goods and services, that are available in a free and open market. Finally, Section 16600 promotes an efficient labor market, allowing human resources to move to their highest and best use. It does so by ensuring that employers "will be able to compete effectively for the most talented, skilled employees in their industries ...." (Application Group, Inc. v. Hunter Group, Inc., supra, 61 Cal.AppAth at p. 901.)

7

5.

Section 16600 Works.

Professor Ronald J. Gilson of Stanford and Columbia Universities attributes the unparalleled success of California's economy to the legal infrastructure created by Section 16600's flat prohibition against employee non-competition agreements. lO (Gilson, Amicus Curiae Brief filed in

Advanced Bionics Corp. v. Medtronic, Inc. (2002) 29 Ca1.4th 697, at p. 8.) He notes, however, that in the absence of a statutory prohibition against restraints on competition, this extraordinary success would not be realized: [T]he problem is that what is optimal for a single firm is also optimal for every firm. Therefore, without a means to assure that all firms allow employee mobility, California high technology industries would be locked into a suboptimal pattern of exacting covenants not to compete from their employees. While each firm would be better offby assuring employee mobility provided that all firms did the same thing, on the individual firm level, the incentive is to restrict employee mobility. Business and Professions Code section 16600 solves this coordination problem. By flatly prohibiting post-employment covenants not to compete, individual firms are prevented from pursuing a selfish strategy that undennines what is best for the industry.

[-n

(Gilson, supra, Amicus Curiae Brief, at p. 8.) Professor Gilson's scholarly conclusions were recently corroborated in a Harvard Business School paper by Professor Lee Fleming, Matt Marx and Deborah Strumsky. The paper documents the state oftechnological innovation in Michigan before 1985 - when Michigan's law was virtually identical to California's - and after 1985 when Michigan adopted a "rule of reason" approach to employee non-competition agreements similar to that followed in most other states. The authors found that the enforcement of

See Ronald 1. Gilson, The Legal Infi-astructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete (1999) 74 N.Y.U.L. Rev. 575, 603-609. 10

8

non-competition agreements in Michigan after 1985 tended to reduce innovation by what they described as "star" and "specialist" innovators. They concluded: Constraining the flow of people and thus knowledge, enforcing [jurisdictions] may fail to develop entrepreneurial and technologically dynamic economies. Consistent with Gilson's arguments, industry growth may be attenuated as startups fail to condense in enforcing [jurisdictions]. The networks of small companies so crucial to Silicon Valley's growth would be less likely to develop in [jurisdictions] that enforce noncompetes. (Marx, Deborah Stumsky & Lee Fleming, Noncompetes and Inventor

Mobility: Specialists, Stars, and the Michigan Experiment, at 23 [citations omitted] [http://www.hbs.edu/research/pdf/07-042.pdfj.) In short, California's policy of free competition and employee mobility works. It has stood the test of time and played an important role in the extraordinary success of California's economy. The Legislature's sound policy decision should not be undone by judicially created "exceptions" that tend to promote, rather than eliminate, contractual restraints on competition.

B.

FEDERAL AND STATE COURTS HAVE LOST SIGHT OF THE LEGISLATURE'S POLICY CHOICE AND HAVE CREATED CONTRADICTIONS IN THE LAW 1.

The Legislature's Sound Policy Choice Is Implemented By Section 16600's Bright-Line Rule Against Contractual Restraints.

The Legislature implemented its sound policy decision by creating in Section 16600 a bright-line rule or an "absolute bar to postemployment

9

- - - - - - - - - - _.... -

restraints."l1 (KGB, Inc. v. Giannoulas (1980) 104 Cal. App. 3d 844, 848.) The intended effect of Section 16600's sweeping prohibitions and enumerated exceptions was to "eliminate[] from the controversy arising upon such restriction the question as to what is a reasonable [restraint], by specifically defining it, and thus preventing litigation; and in this the statute is wise and salutary ...." (City Carpet-Beating, etc, Works v. Jones (1894) 102 Cal. 506, 511 [emphasis added].)

2.

The Ninth Circuit's "Partial Restraint" Exception.

In a series of decisions over the past two decades, the Ninth Circuit has undercut the "wise and salutary" effect of Section 16600's bright-line rule by permitting "exceptions" for "partial" restraints. Its departure ignores precedent,12 as well as the letter and spirit of Section 16600, and fuels, rather than eliminates, the controversy as to which restraints are enforceable and which restraints are not. The "partial restraint" exception derives from the Ninth Circuit's decision in Campbell v. Board ofTrustees ofLeland Stanford Junior Univ. th

(9 Cir. 1987) 817 F.2d 499, where the Ninth Circuit adopted the erroneous view that Section 16600's prohibition against contractual restraints applies only to contracts that completely preclude a departing employee from

See Howardv. Babcock (1993) 6 Cal.4th409, 416 [citing Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284,288]; Hill Medical COlp. v. th Wycoff(2001) 86 Cal.AppA 895,901 [same].

11

See Chamberlain v. Augustine (1916) 172 Cal. 285, 289 [The statute makes no exception in favor of contracts only in partial restraint of trade."]; Davis v. Jointless Fire Brick Co. (9 th Cir. 1924) 300 F. 1,3 [same]; see also Scottv. Snelling & Snelling, Inc. (N.D.Cal. 1990) 732 F.Supp. 1034, 1042 ["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"].) 12

10

engaging in an entire profession, trade or business, but does not invalidate restraints "where one is barred from pursuing only a small or limited part of the business, trade or profession." (Id. at 502.) Compounding it erroneous interpretation, the court placed the burden on the employee to prove that the restraint completely prevented him from pursuing his profession (rather than the employer bearing the burden of proving unfair competition - the prior Ninth Circuit standard13). (Id.)

In General Commercial Packaging, Inc. v. TPS Package Eng'g, Inc. (9 th Cir. 1997) 126 F.3d 1131, 1134 ("TPS"), the Ninth Circuit retreated somewhat from its all-or-nothing position by holding that Section 16600 would invalidate a restraint that "plac[ed] a substantial segment of the market off limits," rather than the "entire" market. (Id. at 1134 [emphasis added].) Nonetheless, the court maintained that Section 16600 would permit restraints that merely limited access to a "narrow segment" of the market, opining that the focus of the inquiry should be on "the breadth of the restraint." (ld. at 1133-1134 [emphasis added].) Notwithstanding the court's contrary claim (id.), this focus openly invites a determination as to what might be considered "reasonable" in any given case. The Ninth Circuit's departure from settled California law construing Section 16600 reached its zenith in Int'l Bus. Mach. Corp. v. Bajorek (9th Cir. 1999) 191 F.3d 1033 ("Bajorelc'), a case involving a forfeiture of stock options if the former employee engaged in competition. The court ignored its own holding in TPS regarding "substantial segment" of the market, and

See Hollingsworth Solderless Terminal Co. v. Turley (9th Cir. 1969) 622 F.2d 1324, 1338 ["'[T]he employer will be able to restrain by contract only that conduct of the former employee that would have been subject to judicial restraint under the law of unfair competition, absent the contract.'''] [citation omitted]. 13

11

went beyond the "compete" versus "partial" distinction it erroneously drew in Campbell. Instead, it upheld a restraint that required a forfeiture of stock options if the employee worked for any competitor, in any capacity, anywhere in the world. (Id. at 1040.) The court described this restraint as "limited," although the basis for this characterization is unclear. In reaching its conclusion, the Ninth Circuit was forced to recognize the apparent conflict with this Court's decision in Muggill v. Reuben H Donnelley Corp. (1965) 62 Cal.2d 239. In Muggill, and likewise in Chamberlain v. Augustine (1916) 172 Cal. 285 (a case the Ninth Circuit did not mention in Bajorek), 14 this Court held that monetary penalties or forfeitures predicated upon an employee's decision to work for a competitor of his former employer constitute illegal restraints under Section 16600. 15 Nonetheless, the Ninth Circuit upheld the restraint, purportedly based on its own prior decisions, rather than on precedent set by California's highest court on issues of California law. The triumvirate of Ninth Circuit cases promoting the "partial restraint" doctrine created new law by engrafting numerous, fact-intensive "exceptions" to Section 16600's bright-line rule. The Ninth Circuit's 14 Previously, however, the Ninth Circuit had acknowledged the Chamberlain decision, and cited it as precedent for the very proposition that there is '''no exception in favor of contracts in partial restraint of trade.'" (Davis v. Jointless Fire Brick Co., supra, 300 F. at p. 3 [citation omitted].)

See Chamberlain v. Augustine, supra, 172 Cal. at p. 289 [because liquidated damage clause deterred competition, it constituted an unlawful restrain]; Muggill v. Reuben H Donnelley Corp., supra, 62 Cal.2d at p. 243 [applying same rational to void pension forfeiture clause]; see also Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1971) 20 Cal.App.3d 668, 672-674 [forfeiture of benefits under profit sharing plan contrary to public policy and void under Section 16600].) 15

12

approach encourages employers to use contractual restraints against their employees and to litigate them in every case. The "partial restraint" doctrine thus turns the Legislature's sound policy decision on its head by endorsing the self-interests of employers as paramount over California's interest in free competition and employee mobility and betterment, and by establishing a legal environment in which employers are likely to use, and employees are likely to adhere to, restraints - even if they are patently unlawful- in the majority of cases.

(a)

The "Partial Restraint" Doctrine is Contrary to California Law.

The Ninth Circuit's approach ignores and creates a direct conflict with settled California law. By its plain terms, Section 16600 applies to "every contract by which one is restrained from engaging in a lawful profession, trade or business" (Bus. & Prof. Code § 16600 [emphasis added]). Section 16600 does not differentiate between total or partial restraints, but invalidates all contractual restraints on competition unless they fall within a statutory exception. California courts have been equally clear in their interpretation of Section 16600. For example, in Chamberlain v. Augustine, this Court stated unequivocally that "[t]he statute makes no exception in favor of contracts only in partial restraint of trade." (172 Cal. at 289; see also Morey v. Paladini (1922) 187 Cal. 727, 736; Morris v. Harris (1954) 127 Cal.App.2d 476,478.) Underscoring this pronouncement, the Chamberlain Court set forth what the Amicus Curiae believe is the appropriate standard for detennining whether a contract runs afoul of Section 16600's bright-line prohibition. Such contracts are void if, by enforcing them, the employee

13

"is not as free to [engage in a competing business] as he would have been if he were not bound by it." (Id. at 288 [emphasis added].) Consistent with the Legislature's intent and defInitive ordering of interests, the Chamberlain Court recognized that Section 16600 contemplates the absolute and unfettered freedom to compete, so long as the competition is lawful. Any diminution of that freedom - whether it be narrow or broad, "partial" or "complete" - violates the statute because then the employee, even if only to a small degree, would not be "as free" to compete as he otherwise would have been. As applied, the Ninth Circuit's "partial restraint" doctrine conflicts with long-standing California law in other ways as well. For example, this doctrine is used to stifle or prevent the very competition Section 16600 is designed to promote. The "minor" part of the market declared off-limits will usually be the precise market in which the employee has developed goodwill by virtue of his experience, knowledge and relationships. Under California law, an employer may not use a contractual restraint to protect customer relations and goodwill. (See Golden State Linen Service, Inc. v. Vidalin (1977) 69 Cal.AppJd 1, 12-13 ["goodwill" in customer base cannot be protected with covenants not to compete]; see also Continental Car-Na-Var Corp. v. Moseley, supra, 24 Cal.2d at p. 110; Morris v. Harris, supra, 127 Cal.App.2d at pp. 477-478.) Contrary to this settled law, the Ninth Circuit in TPS upheld a restraint with the sole purpose of protecting the employer's "business relationships with Disney and other California customers." (TPS, supra, 126 F.3d at p. 1132.) Similarly, it is well settled that the protection oflaws enacted to promote public policy cannot be waived by contract, either directly or through the expedient of a choice-of-law clause. (See Civ. Code §§ 1668, 14

----------~-----

3513; Armendariz v. Foundation Health Psychcare Services, supra, 24 Cal.4th atpp. 100-101; Weber, Lipshie & Co. v. Christian, supra, 52 Cal.AppAth at p. 659 ["section 16600 was adopted for a public reason. It follows that Christian could not by agreement waive the benefit afforded by California law."].) Nevertheless, the Ninth Circuit in Bajorek honored a choice-of-Iaw clause and applied New York Law to uphold a complete ban on competitive employment against a California employee. (Bajorek, supra, 191 F.3d at pp. 1041-1042.) Finally, it is well settled that Section 16600's flat prohibition against contractual restraints is not subject to the vagaries of any "reasonableness" standard. "Although at common law and in many states, a restraint on the practice of a trade or occupation, even as applied to a former employee, is valid if reasonable (see Rest.2d Contracts, § 188, pp. 45-47; 14 Williston on Contracts (3d ed. 1972) § 1636, p. 88, et seq., § 1637, p. 103, et seq.), the so-called rule ofreasonableness was rejected by this state in 1872." (Bosley Medical Group v. Abramson, supra, 161 Cal.App.3d at p. 288 [emphasis added]; accord Hill Medical Corp. v. Wycoff, supra, 86 Cal.AppA th at p. 901.) Contrary to this long-standing interpretation of Section 16600, it is evident that the "partial restraint" doctrine introduces some type of "reasonableness" inquiry into the analysis. While the Ninth Circuit presents its approach as a factual inquiry that can be applied with mathematical precision, in reality there can be no exact formula for detennining whether a restraint is appropriately "limited" in scope (Bajorek), whether it restricts a "substantial segment" as opposed to a "narrow segment" of a market (TPS), or whether the restraint only prevents an employee from pursuing "a small or limited part of [his] business, trade 15

-------------~-----------

or profession" (Campbell). To answer each of these questions, courts necessarily will be required to make judgment calls, and those calls will undoubtedly be guided by the court's view of what is "reasonable" given the fact and circumstances of the case. (b)

Insofar as the Ninth Circuit's "Partial Restraint" Doctrine is Premised on Prior California Decisions, Those Decisions Should Be Clarified or Overruled.

The Ninth Circuit's foray into the "partial restraint" doctrine in

Campbell relies primarily on one appellate court decision, Boughton v. Socony Mobil Oil Co. (1964) 231 CaLApp.2d 188. (See Campbell, supra, 817 F.2d at p. 502.) In particular, the Ninth Circuit cited and quoted

Boughton for the proposition that "where one is barred [by a contractual restraint] from pursuing only a small or limited part of a business, trade or profession, the contract has been upheld as valid." (Id. [quoting Boughton,

supra, 231 CaLApp.2d at 192].) But Boughton is simply not about contractual restraints on competition, and therefore has no place in an analysis under Section 16600. Indeed, the contract at issue in Boughton was for the sale of real property. The contract incorporated a deed restriction on the use of the land, but did not restrain the purchaser's right or ability to pursue a lawful profession, trade or business. (Boughton, supra, 231 CaLApp.2d at p. 190 ["The single restriction is imposed, not personally on plaintiffs restraining them from engaging or carrying on any profession, trade or business but, on the use of the land ...."].) The Boughton court itself seemed to recognize this, concluding at the outset that "the restriction in the deed does not fall within the purview of [Section 16600]." (Id. at 190.)

16

Other courts have recognized that nothing in the text of Section 16600 limits the right of property owners to control the use of their property as they please. For example, in Grogan v. Chaffee (1909) 156 Cal. 611, this Court observed: "Section 1673 of the Civil Code makes void every contract by which one is restrained from 'exercising a lawful profession, trade, or business . . . . But this is far different from a contract limiting [one's] right to dispose ofa particular piece ofproperty, except upon certain conditions. As the owner of property has the right to withhold

it from sale, he can also, at the time of its sale, impose conditions upon its use without violating any rule of public policy." (Id. at 615.) Unfortunately, the inapposite statement in Boughton that Section 16600 does not invalidate contracts "where one is barred from pursuing only a small or limited part of a business, trade or profession" has not been confmed to contracts dealing with property rights, but instead has found its way into the lexicon of decisional law dealing with restraints on competition. As such, this statement cannot be reconciled with the pronouncements of this Court, discussed above, holding that Section 16600 "makes no exception for contracts only in partial restraint of trade." (Chamberlain v. Augustine, supra, 172 Cal. at p. 289.)

Nonetheless, the Ninth Circuit relied on Boughton's misstatement as the basis for the "partial restraint" exception it created in Campbell, reiterated in TPS, and extended in Bajorek. Moreover, the Ninth Circuit expressly rejected the distinction drawn by the Boughton court itself - i.e., that contracts whereby property owners lawfully exercise control over the use or disposition of their property are simply not restraints on trade that "fall within the purview" of Section 16600. (See TPS, supra, 126 F.3d at p.

17

1133 & fn.1 [rejecting right-to-contro1 property vs. restraint of trade distinction] .) Because of the Ninth Circuit's departure from settled law, it is now necessary for this Court to reiterate the rule it laid down long ago in

Chamberlain v. Augustine: "[Section 16600] makes no exception in favor of contracts only in partial restraint of trade." (172 Cal. at 289.) The Court should also either clarify or overrule Boughton to the extent it suggests that partial restraints on competition are permissible in California.

3.

The So-Called "Trade Secret" Exception.

The Ninth Circuit's "partial restraint" doctrine is not the only judicially-created exception to Section 16600 that has proven troublesome for California employees, employers and courts. Equally problematic is the so-called "trade secret exception." This exception has its genesis in dicta in Muggill v. Reuben H

Donnelley Corp., where this Court observed that Section 16600 "invalidates provisions in employment contracts prohibiting an employee from working for a competitor after completion of his employment or imposing a penalty if he does so ... unless they are necessary to protect the

employer's trade secrets." (62 Cal.2d at p. 242 [emphasis added, citations omitted].) The dicta in Muggill, in tum, is predicated on a series of "traderoute" cases, which culminated in this Court's decision in Gordon v.

Landau (1958) 49 Cal.2d 690. In Gordon, this Court upheld a restraint in the employment contract of a "house-to-house installment sa1es[person]" that prohibited him from calling on his fanner customers upon termination. (See 49 Cal.2d at pp. 691- 692.) Central to the Gordon Court's conclusion was its finding that the employer's customer list "is a valuable trade secret and that plaintiffs 18

were damaged by defendant's unlawful use thereof." (Id. at 694 [emphasis added].) As one court recently observed, the "core" reasoning of the traderoute cases is that "information about the customer could be protected because it was confidential, proprietary, and/or a trade secret." (Thompson v. Impaxx, Inc (2003) 113 Cal.AppAth 1425, 1429; accord Moss, Adams &

Co. v. Shilling (1986) 179 Cal.App.3d 124, 130.) Building on these cases, California courts have sometimes recognized an exception to Section 16600 for restraints that are both "narrowly tailored,,16 to a proprietary or property right 17 and "necessary,,18 to prevent unfair competition. 19 This formulation of the law, however, simply results in unnecessary litigation. As the Amicus Curiae explain below, contractual restraints are never "necessary" to protect the employer's legal rights. Moreover, such restraints simply cannot be

See Kolani v. Gluska (1998) 64 Cal.AppAth 402,406 [only "narrowly tailored" restrictions are lawful]; Metro Traffic Control, Inc. v. Shadow Traffic Network, supra, supra, 22 CaLAppAth at p. 861 [contractual restrictions must be "carefully limited" to be valid); Latona v. Aetna U.S. Healthcare, Inc. (C.D. CaL 1999) 82 F.Supp.2d 1089, 1095 [only "carefully limited" contracts are valid]. 16

E.g., Gordon v. Landau, supra, 49 Cal.2d at p. 694 [trade secrets]; Boughton, supra, 231 CaLApp.2d at p. 192 [real property]; King v. Gerold (1964) 231 Cal.App.3d 316,317 [intellectual property]. 17

See Muggill v. Reuben H Donnelley Corp. supra, 62 Cal.2d at p. 242 [restraints are void "unless they are necessary to protect the employer's trade secrets"]; Great Western etc. v. J.A. WathenD. Co. (1937) 10 Cal.2d442, 44849 [to be valid restriction cannot be "greater than protection to the other requires"]; Grogan v. Shajfee, supra, 156 Cal. at p. 615 [same]. 18

See Metro Traffic Control, h1C. v. Shadow Traffic Network, supra, 22 th Cal.AppA at p. 861 [restrictions are void unless they merely protect against unfair competition]; Hollingsworth Solderless Terminal Co. v. Turley, supra, 622 F.2d at p. 1338 [same]; Latona v. Aetna U.s. Healthcare, Inc., supra, 82 F.Supp. 2d at p. 1096 [same]. 19

19

"narrowly tailored" to the point that they eliminate the threat of litigation and the accompanying in terrorem effect that secures compliance with contractual restraints - even plainly illegal ones - in the majority of cases.

(a)

Contractual Restraints are Never "Necessary" to Protect an Employers Rights.

It is beyond cavil that California law is duly solicitous of an employer's right to protect its property and to be free from unfair and unlawful competition. "That equity will always protect against the unwarranted disclosure of trade secrets and confidential communications and the like is, of course, settled beyond peradventure." (Empire Steam Laundry v. Lozier (1913) 165 Cal. 95, 100-102; Continental Car-Na-Var Corp. v. Moseley, supra, 24 CaL2d at p. 110.) Today, these rights are secured through a variety of different laws, including California's Unfair Competition Law ("UeL," Bus. & Prof Code §§ 17200 et seq.), the Uniform Trade Secrets Act ("UTSA," Civ. Code §§ 3426 et seq.), and other laws prohibiting breach of fiduciary duty, tortious interference with contractual relations, and the like. Section 16600 does absolutely nothing to undermine those rights or to prevent an employer from invoking the appropriate laws to protect itself against

unfair competition. Section 16600 no more permits a departing employee to misappropriate his fonner employer's trade secrets than it permits him to steal money, kidnap his fonner employer's salesmen, or burn down his former employer's factory. Accordingly, contractual restraints that purport to "protect" rights of an employer that are already protected by other laws are entirely superfluous. As the court observed in Metro Traffic Control, Inc. v.

Shadow Traffic Network, '" [1]t seems that [under § 16600] the employer will be able to restrain by contract only that conduct of the fonner

20

employee that would have been subject to judicial restraint under the law of unfair competition, absent the contract. '" (22 Ca1.App.4th at p. 861 [citation omitted].) With this perceptive observation in mind, it is apparent that contractual restraints for the protection of trade secrets and the like are

never "necessary" because those rights are already protected by California trade secret and unfair competition laws without the restraint. A perfect example is found in Morlife, Inc. v. Perry (1997) 56 Ca1.App.4th 1514. There, former employees of a commercial roofmg repair company started up a competing business and began calling on customers of their former employer. The former employer sued them for "misappropriating confidential customer information." (Id. at 1517.) There is no mention anywhere in the court's opinion that the employees had contractual agreements not to solicit former customers, or that the employer was attempting to enforce any such restraints. To the contrary, traveling exclusively under the UTSA, the fonner employer pleaded and proved that its customer list was a trade secret and obtained an injunction against the use of said list by its former employees. (Id. at 1519-1531.)20 Had this same approach been taken in Gordon v. Landau, the socalled "trade secret exception" might never have been born. Given this Court's express finding that the customer list in Gordon constituted "a valuable trade secret," it is quite likely that the Court would have reached

20 Another example is Hollingsworth Solderless Terminal Co. v. Turley, where the court held that it could not detennine if a restraint violated Section 16600, because the employer's separate, unfair competition claim had not yet been detennined. (622 F.2d atpp. 1338-1339.) In other words, the contractual restraint was entirely superfluous and redundant ofthe employer's rights under California's unfair competition laws.

21

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the exact same result, and afforded the exact same relief, even if there had been no contractual restraint. (b)

Pure Non-Competition Clauses Should Be Declared Illegal Per Se Because They Are Unnecessary and, By Definition, Not Narrowly Tailored to Protect an Employer's Legal Rights.

The Amicus Curiae submit, as a fIrst step in eliminating the uncertainty and controversy created by the "trade secret exception," this Court should declare that pure non-competition clauses - i.e., provisions that impose any type of restraint on an employee's ability to start a competing business, work for a competitor, or sell competing goods and services - are illegal per se. Such clauses cannot be justifIed to protect trade secrets, or for any other reason. Notwithstanding the so-called "trade-secret" exception, no California court has ever upheld a true non-competition agreement, not to protect trade secrets, not to prevent unfair competition, not for any reason whatsoever. The explanation is simple. First, as pointed out above, such broad restraints are never "necessary" to protect an employer's legal rights. Second, pure restraints on competitive activity are obviously broader than required to protect the former employer from unfair competition, including the use or disclosure of trade secrets. 21 These observations are fully corroborated by recent decisions construing both the scope of Section 16600 and the anti-competitive effect As Professor Gilson colorfully observed, while employee non-competition agreements might be effective in preventing the disclosure of trade secrets, they "are effective in the same sense that burning down a house to eliminate tennites is effective: the problem is efuninated but the collateral damage from the solution is worse than the problem itself." (Gilson, supra, AInicus Curiae Brief at pp. 10-11.) 21

22

of the "trade secret exception." For example, inD'Sa v. Playhut, Inc. (2000) 85 Ca1.App.4th 927, the court reviewed a non-competition agreement that prohibited the employee from working "directly or indirectly" on a "Competing Product." (Id. at 930-931.) The court held that merely requiring California employees to sign an agreement with this type of noncompete provision violated the strong public policy expressed in Section 16600. (Id. at 933.) In reaching this conclusion, the court flatly rejected the former employer's argument that the restraint could be narrowly construed as "necessary" to protect trade secrets. (Id. at 935.)

(c)

Restraints On Soliciting Customers Should Be Declared Illegal Per Se Because They Are Unnecessary to Protect an Employer's Legal Rights and Cannot Be Narrowly Tailored to Protect Those Rights.

To fulfill the Legislative mandate of Section 16600 and eliminate the ongoing abuse of the so-called "trade secret exception," this Court should also take the next logical step and reverse the timeworn "trade route" cases. The Court should declare that customer non-solicitation provisions are void, period. They are not necessary to protect trade secrets or confidential infonnation, and cannot be "narrowly tailored" to protect the employer's interests without violating California's interests embodied in Section 16600, either. Existing California decisions lend strong support to the Amicus Curiae's position. Initially, there can be no doubt that customer nonsolicitation clauses are anticompetitive. As one court rhetorically observed, "[While such] clause[s] [are] less restrictive, and less anticompetitive than the broad, traditional anticompetitive clauses .... [they are] nevertheless anticompetitive - why else would [the employer] ask employees to sign it?"

23

(Thompson v. Impaxx, Inc., supra, 113 Ca1.App.4th at p. 1429.) Employers

use non-solicitation provisions to protect customer relations and goodwill, not just customer information.

In addition, as explained above, non-solicitation clauses are never "necessary" to protect the employer's legal rights because the employer already enjoys such protections under other laws. Moreover, insofar as an employer believes it necessary to have some type of contractual protection against the misappropriation of its trade secrets, a simple non-disclosure clause will do. (See Latona v. Aetna Us. Healthcare, Inc., supra, 82 F.Supp.2d at p. 1096 [employer's confidentially agreement provides "all of the protection of its trade secrets and other confidential information that [employer's needs and] the law allows."].) Finally, it can never be determined that a non-solicitation clause is "narrowly tailored" to protect trade secrets because the question whether a customer list is a trade secret can never be answered solely with reference to the contract. As one court correctly observed, "an agreement between employer and employee defining a trade secret may not be decisive in determining whether the court will so regard it." (Loral Corp. v. Moyes (1985) 174 Ca1.App.3d 268,275.) Indeed, "[t]he issue of whether infonnation constitutes a trade secret is a question of fact .... [and] recitals [in the employment agreement] alone do not establish anything. Labeling information as a trade secret or as confidential information does not conclusively establish that the information fits this description." (Thompson v. Impaxx, Inc., supra, 113 Ca1.App.4th at p. 1430.)

It follows that three likely outcomes result from the use of customer non-solicitation clauses. The first outcome is litigation to detennine whether the former employer's customer list is entitled to trade secret 24

protection. The most curious aspect of this alternative, however, is that the litigation would have nothing to do with the contractual restraint. Rather, the former employer would have to demonstrate trade secret status under the pleading and proof requirements of the UTSA. (See Thompson v.

Impaxx, Inc., supra, 113 Ca1.AppAth at p. 430 [recognizing possibility that former employer might prove that its customer information fit the definition ofa trade secret under Civ. Code § 3426.1]; see also Hollingsworth

Solderless Terminal Co. v. Turley, supra, 622 F.2d at pp.1338-39 [question whether contractual restraint was enforceable turned on whether employer could prevail on its separate claim for unfair competition],) A second and more likely outcome is that the employee and prospective employers will simply adhere to the contractual restraint based on what one court aptly described as the in terrorem effect: Even if they strongly suspect that [the clause] is unenforceable, . . . employees will be reluctant to challenge the legality of the contractual terms and risk the deployment of [the former employer]'s considerable legal resources against them. Thus, the in terrorem effect of the [a]greement will tend to secure employee compliance with its illegal terms in the vast majority of cases. Prospective future employers, too, may be reluctant to hire [the fonner employer]'s workers; even if secure in the knowledge of the unenforceability of [the] clause, these employers may well wish to avoid the expense and energy of defending a lawsuit in which they are likely to be joined.

(Latona v. Aetna

u.s. Healthcare, Inc., supra, 82 F.Supp.2d at pp. 1097-

1098.) The third and most likely outcome is that the employee, "having no reason to familiarize [himself] with the specifics of California's employment law, will tend to assume that the contractual tenns proposed by their employer ... are legal, if draconian." (Id. at 1097.) Such employees would likely "act on their interpretation rather than consult an

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attorney to find out if their interpretation is correct." (D'Sa v. Playhut, Inc.,

supra, 85 Ca1.AppAth at p. 935.) As a result, they would "honor these clauses ... , thus directly undermining the statutory policy favoring competition." (Kolani v. Gluska, supra, 64 Ca1.AppAth at p. 407.) If employers could be counted on to refrain from using nonsolicitation clauses except in cases where their customer lists and related information qualified as trade secrets, perhaps none of this would matter. But experience indicates otherwise. Recent decisions like Kolani and

Latona demonstrate the penchant of some California employers to use broad and illegal non-solicitation clauses to restrain competition. Moreover, a long line of California cases reveals that some employers will always be willing to use such clauses, or otherwise try to prevent former employees from calling on their customers, even where it is readily apparent that their customer lists are not trade secrets. (E.g., Continental

Car-Na-Var v. Mosley, supra, 24 Ca1.2d 104; American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Ca1.App.3d 1318; Fortna v. Martin (1958) 158 Ca1.App.2d 634; Mathews Paint Co. v. Seaside Paint & Lacquer Co. (1957) 148 Ca1.App.2d 168; Avocado Sales Co. v. Wyse (1932) 122 Ca1.App. 627.)

(d)

An "Exception" For Customer Non-Solicitation Clauses to Protect Confidential Customer Lists Invites Abuse and Creates an In Terrorem Effect that Undermines the Important Public Policy and Fundamental Rights Section 16600 Was Designed to Protect.

By recognizing an "exception" for customer non-solicitation clauses on the ground that they might be consistent with the protection of a trade secret customer list, this Court in Gordon, and subsequently in Muggill,

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inadvertently opened the door to abusive practices that undennine the important public policy and fundamental rights Section 16600 was designed to protect. If we still lived in simpler times when milkmen, ice companies, bakeries, launderers and all manner of salesmen plied their trades from door to door, perhaps the thinking of Gordon and other "trade-route" cases would retain some currency. But times have changed. Today, employers use (or more accurately, misuse) contractual restraints, including pure noncompetition clauses and customer non-solicitation provisions for no other reason than to protect themselves against competition from their former employers. As more modern decisions have recognized, these employers can rely on a combination of ignorance and fear to exact compliance with such restraints in many if not most cases - even cases where the restraints are patently illegal. It is time for this Court to recognize that de facto compliance is inherent in all restraints, and offends California's interest in preventing anti-competitive conduct. Judicially created "exceptions" to the bright-line rule established by the Legislature over a century ago make the problem worse by encouraging or at least inviting litigation, thus creating an in terrorem effect. This flies in the face of what Section 16600 was designed

to accomplish. (See City Carpet-Beating, etc, Works v. Jones, supra, 102 Cal. at p. 511; Application Group, supra, 61 Cal.App.4th at p. 901 [Section 16600 is intended to protect employers and employees "from anticompetitive conduct ... including litigation based on a covenant not to compete . . . ."].)

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C.

THE COURT SHOULD VINDICATE THE FUNDAMENTAL RIGHT PROTECTED BY SECTION 16600 AND ENSURE AN EVEN PLAYING FIELD IN CALIFORNIA As demonstrated above, the rights afforded by Section 16600 are

important, fundamental and cherished, but they are also fragile. They can be easily defeated by the use of unlawful restraints when there is uncertainty in the law. Guidance is therefore necessary from this Court.

1.

The Proposed Solution.

The Court should re-affmn its holding in Chamberlain and enforce Section 16600's bright-line rule against all post-employment restraints on competition. In doing so, the Court will necessarily reject the Ninth Circuit's "partial restraint" doctrine. It will also rej ect or clarify dicta suggesting that there is a "trade secret exception" to Section 16600, and correct the current misperception in the law that employment contracts may be used to restrain lawful competition. Eliminating the judicially created exceptions and clarifying existing uncertainties and conflicts in the law is the best and perhaps, the only way to effectuate the Legislature's policy of free competition and employee mobility.

2.

Benefits of the Proposed Solution.

Affirming the Legislature's bright-line rule against restraints on competition would yield a number of significant benefits. It will restore the balance intended by the Legislature in favor of free competition and employee mobility, which has fueled California's economy for over a century. It will substantially reduce needless litigation over the validity of contractual restraints under Section 16600, and eliminate the incentive of employers to "cheat" the system by declaring all post-employment restraints on competition void per se. It will create a disincentive for "cheating" by holding that the use of such restraints constitutes unlawful

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competition. Finally, a bright-line rule would largely prevent "de facto" restraints on competition by eliminating the "in terrorem" effect, and restore a level playing field for California businesses that, in compliance with California law, do not use restraints on competition in their employment contracts. At the same time, a bright-line rule would not prevent employers from using and!or enforcing contracts that control the use of real, personal or intellectual property (e.g., license agreements, patent rights, etc.). Similarly, it would not prevent employers from using general contractual provisions against the misuse or disclosure of trade secrets or confidential information. Nor would it prevent them from bringing an action under VTSA or VCL, subject only to the pleading and proof requirements of those laws. And the employer would still be able to seek appropriate remedies including, for example, an injunction against soliciting its customers upon proof that its customer list is truly a trade secret. In sum, a bright-line rule would restore the paramount nature of the

rights protected by Section 1'6600, and the "wise and salutary" policy of "eliminate[ing] from the controversy ... the question as to what is a reasonable [restraint] by specifically defming it." (City Carpet-Beating,

etc, Works v. Jones, supra, 102 Cal. at p. 511.)

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III. CONCLUSION Based on the foregoing, the Amicus Curiae respectfully request that the Supreme Court both affmn the decision of the Court of Appeal, Second Appellate District, Division Three, and clarify that there are no judicially created exceptions to Business and Professions Code section 16600. Dated: May 14, 2007

Respectfully submitted, FELDMAN GALE P.A. JAMES A. GALE TODD M. MALYNN MICHAEL J. WEBER

BY:~Todd M. Malynn . Attorneys for Amicus Curiae

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CERTIFICATE OF WORD COUNT

Pursuant to California Rules of Court, rule 8.204(c)(l), the Amicus Curiae Briefwas produced using 13-point Times New Roman type style and consists of 8,170 words not including the tables of contents and authorities, caption page, signature block, or this Certification, as counted by the Microsoft Word 2003 word processing program used to generate the brief. The text of the Application to file the Amicus Curiae Brief consists of 1,785 words as counted by the same word processing program. Dated: May 14, 2007

Respectfully submitted, FELDMAN GALE P.A. JAMES A. GALE TODD M. MALYNN MICHAEL J. WEBER

By:

~' :

ToddM. Malynn Attorneys for Amicus Curiae

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