Arthur Andersen Opening Brief On The Merits

Case No. S147190

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

ARTHUR ANDERSEN LLP, Defendant and Respondent.

OPENING BRIEF ON THE MERITS

After a Decision by the Court of Appeal, Second Appellate District, Division Three Case No. B 178246 Los Angeles Superior Court Case No. BC 255796 Honorable Andria K. Richey, Judge

Wayne S. Flick (SBN 149525) Yury Kapgan (SBN 218366) LATHAM & WATKINS LLP 633 West Fifth Street, Suite 4000 Los Angeles, California 90071-2007 Tel.: (213) 485-1234 Fax: (213) 891-8763 wayne.s [email protected]

Sharon A. McFadden, Esq. ARTHUR ANDERSEN LLP 33 West Momoe Street, Floor 18 Chicago, IL 60603-5385

Kristine L. Wilkes (SBN 116693) Colleen C. Smith (SBN 231216) Shireen M. Becker (SBN 237930) LATHAM & WATKINS LLP 600 West Broadway, Suite 1800 San Diego, California 92101-3375 Tel.: (619) 236-1234 Fax: (619) 696-7419 [email protected]

TABLE OF CONTENTS

I.

ISSUES PRESENTED

1

II.

INTRODUCTION AND SUMMARY OF ARGUMENT

1

III.

STATEMENT OF THE CASE

5

A.

The Non-Compete Agreement

5

B.

The Termination Of Non-Compete Agreement..

6

C.

The HSBC Transaction

7

D.

Procedural History

8

IV.

ARGUMENT A.

12

Contrary To The Court Of Appeal's Decision, The Non-Compete Agreement Is A Lawful Restraint On Trade Outside The Prohibition Of Section 16600 1.

Section 16600 Does Not Bar All Employee Non-Competition Agreements a.

b.

c.

12 13

The plain language of Section 16600 permits non-competition agreements that do not prevent one from engaging in his profession

13

The case law confirms Section 16600's plain meaning that noncompetition agreements are lawful unless they preclude pursuit of a business, trade or profession

18

The Ninth Circuit's "narrow restraint" doctrine correctly interprets Section 16600

28

1

d.

e.

2.

31

Out-of-state authority supports tailored competitive restraints protecting customer relationships

36

The Court Of Appeal Erred In Concluding That The Non-Compete Agreement Was Unlawful a. b.

B.

The legislative history of Section 16600 confirms the intent to bar only prohibitions on engaging in a business, trade or profession

The first restriction in the Agreement was lawful

41

The second restriction in the Agreement was lawful

44

Contrary To The Court Of Appeal's Decision, The TONC Is A Lawful, Standard Form Release 1.

2.

40

46

Under The Labor Code, The TONC Release Provision Could Not Waive Employee Indemnification Rights

47

The Court Of Appeal's Interpretation Of The TONC Violated Fundamental Tenets Of Contract Interpretation

55

a.

b.

The Court of Appeal improperly implied a waiver of employee indemnification rights where none existed

55

The Court of Appeal improperly read the TONC to be unlawful

57

11

3.

C.

V.

The Court Of Appeal's Interpretation Of The TONC Has Far-Reaching Adverse Consequences And Leads To An Absurd Result

60

Both The Non-Compete Agreement And The TONC Were Lawful Contracts, And Therefore Cannot Form A Basis For Tort Liability

63

CONCLUSION

65

111

TABLE OF AUTHORITIES Page(s) CASES

Adv. Bionics Corp. v. Medtronic, Inc., 29 Cal. 4th 697 (2002)

23

Azteca Constr., Inc. v. ADR Consulting, Inc., 121 Cal. App. 4th 1156 (2004)

62

Baker Pacific Corp. v. Suttles, 220 Cal. App. 3d 1148 (1990)

.49, 51

Baskin-Robbins Inc. v. Patel, 264 F. Supp. 2d 607 (N.D. Ill. 2003) BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999)

29 38,39

Bosley Med. Group v. Abramson, 161 Cal. App. 3d 284 (1984)

14, 17,32

Boughton v. Socony Mobil Oil Co., 231 Cal. App. 2d 188 (1964) Brandt v. Lockheed Missiles & Space Co., 154 Cal. App. 3d 1124 (1984) Brown v. Kling, 101 Cal. 295 (1894)

passim 56 21, 35

Byrne v. Laura, 52 Cal. App. 4th 1054 (1997)

59

California Steam Navigation Co. v. Wright, 6 Cal. 258 (1856)

34

Campbell v. Bd. of Trustees ofLeland Stanford Junior Univ., 817 F.2d 499 (9th Cir. 1987) Cardiovascular Surgical Specialists, Corp. v. Mammana, 61 P.3d 210 (Okla. 2002)

IV

14, 28 37

Page(s) Centeno v. Roseville Cmty. Hosp., 107 Cal. App. 3d 62 (1979)

,

Chamberlain v. Augustine, 172 Cal. 285 (1916)

32 19,20,21,22

City of Torrance v. Workers' Compo Appeals Bd., 32 Cal. 3d 371 (1982) County ofMarin v. Assessment Appeals Bd., 64 Cal. App. 3d 319 (1976) County ofRiverside v. Super. Ct., 27 Cal. 4th 793 (2002)

.49 59 61, 62

D.A. Schulte, Inc. v. Gangi, 328 U.S. 108 (1946)

61

D'Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (2000)

25, 65

Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill. App. 3d 146 (2001)

39

Della Penna v. Toyota Motor Sales, US.A., Inc., 11 Cal. 4th 376 (1995)

64

Dobbins, DeGuire & Tucker, P. C. v. Rutherford, MacDonald & Olsen, 708 P.2d 577 (Mont. 1985)

37, 38

Dunlop v. Gregory, 10 N.Y. 241 (1851)

34

E.E. O. C. v. Cosmair, Inc. v. L 'Oreal Hair Care Div., 821 F.2d 1085 (5thCir. 1987)

61

Edwards v. Arthur Andersen LLP, 47 Cal. Rptr. 3d 788 (2006)

passim

Ex parte Howell Eng 'g & Surveying, Inc., 2006 Ala. LEXIS 346 (Ala. Dec. 15,2006)

v

37

Page(s) Fitch v. Select Prods. Co., 36 Cal. 4th 812 (2005)

14

Gen. Commercial Packaging, Inc. v. TPS Package Eng'g, Inc., 126 F.3d 1131 (9th Cir. 1997) 29, 30,44 Golden State Linen Serv., Inc. v. Vidalin, 69 Cal. App. 3d 1 (1977) Gordon Termite Control v. Terrones, 84 Cal. App. 3d 176 (1978) Gordon v. Landau, 49 Cal. 2d 690 (1958)

24, 45 27 passim

Hill Med. Corp. v. Wycoff, 86 Cal. App. 4th 895 (2001)

31, 32

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

23,24, 33

Int '1 Bus. Mach. Corp. v. Bajorek, 191 F.3d 1033 (9th Cir. 1999)

27, 29, 44

Jefferson v. Cal. Dep't ofYouth Authority, 28 Cal. 4th 299 (2002)

61

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

23

Jon~s v.

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

22, 57

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

20, 28

Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003) Latona v. Aetna Us. Healthcare Inc., 82 F. Supp. 2d 1089 (C.D. Cal. 1999)

VI

9,63 30,40

Page(s) Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064 (2003)

61

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

passim

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Chung, 2001 WL 283083 (C.D. Cal. 2001)

29

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Ran, 67 F. Supp. 2d 764 (E.D. Mich. 1999)

38

Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853 (1994)

23, 25

Mont. Mountain Prods. v. Curl, 112 P.3d 979 (Mont. 2005)

37

Moore v. Bonnet, 40 Cal. 251 (1870)

35

Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (1997)

23

Morris v. Harris, 127 Cal. App. 2d 476 (1954)

.43

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

27

People v. Standish, 38 Cal. 4th 858 (2006)

17

Perry v. Moran, 748 P.2d 224 (Wash. 1987)

39

Rodriguez v. Barnett, 52 Cal. 2d 154 (1959)

59

VB

Page(s)

S. Tahoe Gas Co. v. Hofmann Land Improvement Co., 25 Cal. App. 3d 750 (1972)

59

Saala v. McFarland, 63 Cal. 2d 124 (1965)

32

Sierra Vista Reg 'I Med. Ctr. v. Bonta, 107 Cal. App. 4th 237 (2003)

55

Smith v. Amedisys Inc., 298 F.3d 434 (5th Cir. 2002)

62

South Bay Radiology Med. Assocs. v. Asher, 220 Cal. App. 3d 1074 (1990)

32

Strong v. Theis, 187 Cal. App. 3d 913 (1986)

59

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

33

Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 (2003)

27

Thompson, Breeding, Dunn, Creswell & Sparks v. Bowlin, 765 S.W. 2d 743 (Tenn. App. 1987)

38

Vacco Indus., Inc. v. Van Den Berg, 5 Cal. App. 4th 34 (1992)

31,32

Warner & Co. v. Solberg, 634 N.W.2d 65 (N.D. 2001)

38

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

38

Wolf & Co. v. Waldron, 366 N.E. 2d 603 (Ill. App. 1977)

39

Wright v. Ryder, 36 Cal. 342 (1868)

31, 35

V111

Page(s) STATUTES Ala. Code. § 8-1-1 (2006)

37

Cal. Bus. & Prof. Code § 16600

passim

Cal. Bus. & Prof. Code § 16601

16

Cal. Bus. & Prof. Code § 16602

16, 23, 24, 33

Cal. Bus. & Prof. Code § 16602.5

16

Cal. Civ. Code § 1638

:

55

Cal. Civ. Code § 1643

58, 59

Cal. Civ. Code § 1668

51

Cal. Civ. Code § 1673 (1872)

passim

Cal. Civ. Code § 3513

62

Cal. Civ. Code § 3541

59

Cal. Civ. Proc. Code § 1858

56, 57

Cal. Lab. Code § 206.5

15, 54, 61

Cal. Lab. Code § 215

54

Cal. Lab. Code § 219

61

Cal. Lab. Code § 225.5

54

Cal. Lab. Code § 2802

passim

Cal. Lab. Code § 2804

passim

Cal. Lab. Code § 2855

61, 62

Cal. Lab. Code § 354

54

Cal. Lab. Code § 365

61

IX

Page(s) Cal. Lab. Code § 432.5

53

Cal. Lab. Code §§ 2800, et seq

62

Cal. Unemp. Ins. Code § 1342

61

Mich. Compo Laws Ann. § 445.761

38

Mont. Code Ann. § 28-2-703

37

Okla. Stat. tit. 15, § 217

37

OTHER AUTHORITIES 1 B. E. Witkin, Summary ofCalifornia Law, Contracts § 750, p. 840 (10th ed. 2005)

58

17A C.J.S. Contracts, § 249 (2006)

36

54A Am. JUL 2d, Monopolies, § 888

,

36

Norman D. Bishara, Covenants Not to Compete in a Knowledge Economy: Balancing Innovation from Employee Mobility Against Legal Protection for Human Capital Investment, 27 Berkeley J. Emp. & Lab. L. 287 (2006) 25, 26 Justice Ming W. Chin, et aI., California Practice Guide: Employment Litigation (The Rutter Group 2005)

47, 61

R. P. Davis, Annotation, Validity and enforceability of restrictive covenants in contracts of employment, 98 A.L.R. 963 (1935)

36

Michael J. Garrison, Limiting the Protection for Employees from Compelled Noncompete Agreements Under State Whistleblower Laws: A Critical Analysis of Maw v. Advanced Clinical Communications, 20 Lab. Law 257 (2005)

26

x

Page(s) Stephen E. Kalish, Covenants Not to Compete and the Legal Profession, 29 St. Louis U. L.J. 423 (1985)

24

William G. Porter II & Michael C. Griffaton, Using Noncompete Agreements to Protect Legitimate Business Interests, 69 Def. Couns. J. 194 (2002)

26

Eric A. Posner & George G. Triantis, Covenants Not to Compete From an Incomplete Contracts Perspective, (John M. Olin Working Paper Series, No. 137 (2001))

26

Ann Taylor Schwing, 2 California Affirmative Defenses § 47: 13 (2005 ed.) Note, Where Have You Gone, Law and Economics Judges? Economic Analysis Advice to Courts, etc., 66 Ohio St. L.J. 1105 (2005)

Xl

61, 62

26

I. 1.

ISSUES PRESENTED

To what extent does Business and Professions Code

Section 16600 prohibit employee noncompetition agreements? 2.

Does a contract provision releasing "any and all" claims

encompass nonwaivab1e statutory protections, such as the employee indemnity protection of Labor Code Section 2802?

II.

INTRODUCTION AND SUMMARY OF ARGUMENT The Court has granted review on two issues that will

dramatically affect employment and other legal relationships in this state. First, the Court will determine the degree to which employers may protect their increasingly valuable human capital, client relationships and proprietary information from raiding or misappropriation by departing employees, through post-employment restrictions which reasonably protect the employees' career opportunities. Second, the Court will decide whether businesses will face unforeseen liability based on the use of standard, widely-used "any and all" release language. On both issues, the Court of Appeal gravely erred, and the results it reached are unnecessary, undesirable and in some respects, absurd.

1

In interpreting Business and Professions Code Section 16600 ("Section 16600") as absolutely prohibiting employers from protecting their property and client relationships through agreements with their departing employees, the Court of Appeal improperly amended the statute in several critical respects. First, as written, Section 16600 does not prohibit all post-employment contractual restrictions; its terms reach only contracts that prevent one from engaging in his or her trade, business or profession. Narrowly drawn post-employment restrictions, leaving open to an employee the opportunity to engage in his or her profession, do not do so and are thus outside the statute's prohibition. Second, the statute does not, contrary to the Court of Appeal's construction, treat employment contracts more restrictively than other contracts; the statute governs "every contract" and does not single out employment contracts for harsher review. Third, Section 16600 is part of a statutory scheme containing express legislative exceptions, meaning that judicial exceptions are not to be implied. However, to reconcile its absolute prohibition with the extensive case authority allowing limited noncompetition agreements, the Court of Appeal was forced to engraft judicially-created exceptions onto the statute's framework.

2

None of these machinations was necessary or warranted. Longstanding precedent applying California law has successfully reconciled the competing interests of employees' freedom to engage in their occupation with employers' legitimate interest in protecting their client and employee relationships, and proprietary information. That precedent correctly reads Section 16600 as written: barring only post-employment contracts that prevent one from engaging in his chosen business or profession, while leaving room for narrow, legitimate constraints. Petitioner Arthur Andersen LLP's narrowly tailored NonCompete Agreement, leaving Respondent Raymond Edwards II free to engage in his profession, is a valid agreement outside the prohibition of Section 16600. The Court of Appeal's other ruling under review is equally anomalous. The court found that a contract in which an employee releases "any and all" claims against his employer is unlawful despite the seemingly universal use of such releases in settlement agreements. The court reasoned that such an agreement is unlawful because-even though the agreement is silent on employee indemnification rights-it must be read impliedly to release such rights, which are unwaivable

3

under Labor Code Section 2802 ("Section 2802"). In other words, the court implied an unwritten and unintended term into the agreement, and then used its creation as a rationale to invalidate it. Making this result even more astounding is the fact that-no matter what is agreed-an employer cannot require an employee to waive indemnification rights. Such an agreement is null and void under Labor Code Section 2804 ("Section 2804"). The release in question simply did not waive employee indemnification rights, so there was no basis for implying such a term. And, it was particularly irrational to do so when the term implied by the Court of Appeal was one that could have no legal effect. It is axiomatic that contracts are to be read to incorporate all applicable terms of law, which the parties are presumed to know, and that, where possible, agreements must be read to be lawful, not unlawful. Only by ignoring these principles, and reaching out to adopt an interpretation that rendered the agreement unlawful, was the Court of Appeal able to invalidate Andersen's Termination of Non-Compete Agreement ("TONC"), which on its face was a valid, straightforward, standard release, and which, by law, could not accomplish the nefarious purpose attributed to it by the Court of Appeal.

4

'Because neither the Non-Compete Agreement nor the TONC was unlawful, there was no "wrongful act" to support Edwards's interference with prospective economic advantage claim. The trial court thus properly entered judgment for Andersen. That judgment should be reinstated.

III.

STATEMENT OF THE CASE

In January 1997, Edwards received an offer from Andersen to work as a tax manager in Andersen's Los Angeles office. Appellant's Appendix ("App.") 386, 708-09. The offer letter requested that Edwards review and sign a Non-Compete Agreement (sometimes referred to herein as the "Agreement"), and advise if he had any questions. App.708. Edwards signed and returned the Non-Compete Agreement to Andersen without discussion. App. 386-87, 706. That agreement remained in place, without question by Edwards, from 1997 until 2002, when the facts giving rise to this lawsuit arose.

A.

The Non-Compete Agreement The Agreement was a nationally-utilized document designed to

protect Andersen's client relationships, human capital and proprietary information, and to prevent Andersen employees from capitalizing upon those relationships or proprietary information upon departure.

5

After leaving, although allowed to be employed by any Andersen client (and anyone else for that matter), managers agreed not to raid Andersen's clients or steal propriety information. For a limited time, they agreed not to perform services for a narrow segment of Andersen clients, not to solicit business from certain clients, not to raid Andersen employees, and not to disclose or use Andersen's confidential trade secret information. App. 1275. Specifically, the Agreement stated that it "does not prohibit you from accepting employment with a client." Id. The Agreement confirmed: "It is not our intent to limit your ability to pursue your professional career if you leave the Firm. Id.

B.

The Termination Of Non-Compete Agreement By April 2002, Andersen was in negotiations to transfer several

of its service teams to other firms in connection with closing its public accounting practice. App. 388,499,905. In extending employment offers to Andersen personnel, these other firms generally required that employees who had signed Non-Compete Agreements with Andersen secure releases from those agreements as a condition of employment. App. 500. Andersen generally agreed to releases of those agreements in return for certain commitments, such as non-disparagement of

6

Andersen and cooperation in Andersen litigation in which the employee might have some involvement. App. 500. This was accomplished through a document entitled "Termination of NonCompete Agreement" or TONC. App. 500, 578-82. The TONC made no mention of employee indemnification rights, and merely included a standard release of "any and all" claims the employee might have against Andersen, "except for claims ... for any accrued and unpaid salary or other employee benefit or compensation owing to Employee as of the date hereof." App.579.

C.

The HSBC Transaction In May 2002, Andersen began negotiating with HSBC

regarding HSBC's acquisition of a portion of Andersen's Los Angeles tax practice. App. 390, 686-87. As part of that sale, Andersen arranged for the employees in that group (including Edwards) to obtain employment with HSBC; Edwards had no preexisting relationship with HSBC, but was given the opportunity for employment with HSBC through Andersen's sale of its practice. HSBC required, however, that individuals accepting employment with HSBC be released from any Andersen restrictive covenants. App. 539. Andersen utilized the TONC to accomplish the release. Under

7

the agreement between HSBC and Andersen, Andersen was required to deliver to HSBC a signed TONC for every person subject to restrictive covenants (including Edwards). App.539. However, nothing in that agreement prohibited HSBC from hiring Edwards ifhe

did not obtain a release from Andersen by signing the TONC. See App. 542-76. On June 27 and July 8, 2002, Edwards received letters from HSBC offering him employment. That offer contained a new noncompete clause on behalf of HSBC and a requirement that Edwards obtain, as a condition of employment, a release from any restrictive covenants he had with Andersen. App. 633, 721-25, 392-93, 639-40, 733-37. Edwards signed the July 8 offer letter, but thereafter refused to sign the TONC. App.392-93. As a result of Edwards's refusal to sign the TONC, HSBC eventually withdrew its contingent employment offer. App. 655, 800. There is no evidence that Andersen participated in HSBC's decision to withdraw its offer to Edwards.

D.

Procedural History On April 30, 2003, Edwards filed a complaint against

Andersen, HSBC and others. App. 1. Other than the interference

8

claim, all claims against Andersen have been dismissed through demurrer or summary adjudication. Edwards's remaining interference claim is predicated upon Andersen's alleged "wrongful acts" in (1) refusing to release Edwards from the 1997 Non-Compete Agreement without corresponding minimum commitments from Edwards in the TONC (e.g., non-disparagement of Andersen and cooperation in Andersen litigation which involved Edwards); and (2) requiring Edwards to execute the TONC, both of which allegedly prevented Edwards from obtaining employment with HSBC.! The trial court granted Andersen's motion to sever purely legal issues from factual issues and then held as a matter of law that both agreements were lawful and did not constitute independently wrongful acts because: (l) the Non-Compete Agreement was narrowly tailored, did not deprive Edwards of his right to pursue his profession and therefore was not unlawful under Section 16600; and (2) the TONC's

In California, the tort of interference with prospective economic advantage requires proof that the defendant had knowledge of a preexisting economic relationship between the plaintiff and a third party and intentionally acted to disrupt the relationship, resulting in economic harm to the plaintiff. Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1153 (2003). To recover damages, the plaintiff must prove that the defendant acted wrongfully apart from the interference itself See id. at 1153-54. 9

standard release is silent on the issue of statutory indemnification rights (and all other unwaivable rights), and therefore could not reasonably be interpreted as requiring a waiver of such rights. App. 2154; Reporter's Transcript ("RT") 173-79 (07/21/04). The trial court therefore entered judgment for Andersen. App.2233. Edwards appealed, arguing that the Non-Compete Agreement and the TONC were unlawful in California, and therefore supported his interference claim. Appellant's Opening Brief ("AOB") at 1. The Court of Appeal reversed, holding that both agreements were unlawful, and therefore could satisfy the "wrongful act" element of Edwards's interference claim. Edwards v. Arthur Andersen LLP, 47 Cal. Rptr. 3d 788, 791. First, the court held that the Agreement was invalid under Section 16600 because it was a non-competition agreement which did not fall within the express statutory or judicially-created exceptions to the statute. Id. at 791. The court adopted a bright line rule, outlawing all employee non-competition agreements regardless of their scope and effect on the employee's ability to engage in his trade, business or profession: We conclude a noncompetition agreement between an employee and employer, prohibiting the employee from 10

performing services for certain former clients, is invalid under ... section 16600 unless it falls within the statutory or "trade secret" exceptions to the statute. Such a noncompetition agreement is invalid even if the restraints imposed are narrow and leave a substantial portion o/the market open to the employee. In so holding, we conclude the "narrow restraint" exception to section 16600, articulated by the Ninth Circuit, is not a proper application of California law.

Id. (emphasis added). Second, although the TONC makes no reference to Edwards's indemnification rights, the Court of Appeal held the TONC to be unlawful because, it concluded, the TONC impliedly waived those rights. The court found an implied waiver (in the face of contractual silence) even though such rights cannot be waived as a matter oflaw under Sections 2802 and 2804: We further hold that the TONC purported to waive Edwards's Labor Code section 2802 indemnity rights. Because Labor Code section 2802's indemnity provisions implement public policy, requiring Edwards to waive indemnity rights as a condition of continued employment violated public policy and constituted an independently wrongful act for purposes of the intentional interference with prospective economic advantage claim.

Id. at 792. Finally, the court found that because the Non-Compete Agreement was unlawful, it was an independently wrongful act for

11

Andersen to ask Edwards to sign the TONC in exchange for releasing him from the Non-Compete Agreement. Id. at 791. On November 29, 2006, this Court granted review. On January 17,2007, the Court specified for review the two issues listed above.

IV. A.

ARGUMENT

Contrary To The Court Of Appeal's Decision, The NonCompete Agreement Is A Lawful Restraint On Trade Outside The Prohibition Of Section 16600 The Court of Appeal's determination that the Non-Compete

Agreement was invalid was based upon its sweeping, absolute reading of Section 16600. The court held that Section 16600 proscribes all employee non-competition agreements without differentiation, unless the agreement falls within statutory or judicially-created "trade secret" exceptions to the statute. Edwards, 47 Cal. Rptr. 3d at 796. As the Court of Appeal acknowledged, this construction prohibits all restrictions on employee competition (other than the limited exceptions) even where the restriction leaves the employee free to practice his trade or profession. Id. at 798. This approach rewrites the plain statutory language, and defies the decisions of this Court, other court of appeal opinions, and federal precedent construing California law.

12

1.

Section 16600 Does Not Bar All Employee NonCompetition Agreements a.

The plain language of Section 16600 permits non-competition agreements that do not prevent one from engaging in his profession

The Court of Appeal's decision cannot be reconciled with either the plain language or the structure of Section 16600 and related sections. Contrary to the Court of Appeal's conclusion, Section 16600-by its very terms-does not prohibit all employee "non. .

competItIOn agreements.

,,2

Section 16600 does not discuss "non-competition agreements." Rather, the section bars only agreements that prevent one from engaging in his or her line of work, and such agreements are invalid only to the extent that they do so. The statute states: "[E]very

2

The broad rubric of "non-competition agreements" is itself an invitation to imprecise and erroneous analysis. As the case law makes clear, used carelessly, this term may include entirely distinct forms of agreement, ranging from a blanket prohibition against an employee competing with his former employer by barring him from that field entirely, to competitive restrictions with field, time or geographic limitations, to restrictions against soliciting any clients of the former employer, to restrictions on soliciting specific named clients or clients specified by category. Thus, "non-competition agreements" may encompass absolute agreements not to compete, as well as "noninterference" and "non-solicitation" agreements. Many of these agreements are imbued with trade secret considerations, as well, which are inseparable from employers' investment in the people who carry those secrets with them. 13

contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Cal. Bus. & Prof. Code § 16600. Thus, by its plain terms Section 16600 does not ban all non-competition agreements: Section 16600 voids contracts only to the extent that they prevent or preclude a person from pursuing his or her vocation. See, e.g., Campbell v. Bd. of

Trustees ofLeland Stanford Junior Univ., 817 F.2d 499,502 (9th Cir. 1987) ("Section 16600 only makes illegal those restraints which

preclude one from engaging in a lawful profession, trade, or business"); Bosley Med. Group v. Abramson, 161 Cal. App. 3d 284, 288 (1984) ("Section 16600 provides generally that contracts which

prevent anyone from engaging in a lawful profession, trade or business are void.") (emphases added).3 If the Legislature intended to bar all non-competition

agreements, it could have done so in simple terms; the Legislature knows how to impose a blanket ban when one is intended. Indeed,

3

While the Court of Appeal acknowledged the established principle that when interpreting a statute, courts are to "follow the Legislature's intent, as exhibited by the plain meaning of the actual words of the law," Edwards, 47 Cal. Rptr. 3d at 800 (citing Fitch v. Select Prods. Co., 36 Cal. 4th 812,818 (2005», the Court of Appeal nevertheless failed to examine the language of Section 16600. Id. 14

two examples of statutes categorically rendering certain forms of employment contracts invalid are discussed herein, Labor Code Sections 2802 and 2804 (nullifying contracts purporting to waive employee indemnification rights), and Labor Code Section 206.5 (nullifying and rendering unlawful contract requiring employee to release claim for wages due). A comparison between the strict, absolute language of those statutes and the limited reach of Section 16600 demonstrates the fallacy of the Court of Appeal's absolutist interpretation. The court's opinion disregards the plain language of the statute in yet another critical way. The statute does not distinguish between employment contracts and other contracts; the statute covers "every contract" made by "anyone," without differentiation. Ignoring this language, the Court of Appeal adopted a rule that applies to employment contracts only. Edwards, 47 Cal. Rptr. 3d at 795-96, 802-03. The result is untenable. Because the same rule must extend to "every contract" given the statutory scope, the court's reading means either that all non-competition agreements are barred (an approach that would overturn a century of precedent allowing reasonable

15

restraints), or the court must read into the statute a limitation that applies only to employment contracts (a limitation that is not supported by the express statutory language or the case law discussed below, which applies Section 16600 to a wide range of commercial relationships, not just employment contracts). The Court of Appeal chose the latter, and its willingness to adopt a unique rule for employment contracts in the face of statutory language extending to all contracts sacrifices reasoned statutory analysis to result-oriented jurisprudence. Reading Section 16600 consistently with its plain languagewhich permits all contracts to the extent that they do not prevent engagement in one's trade, business or profession-also comports with the statute's overall framework. Even contracts that fall within the prohibition of Section 16600 are subject to several statutory exceptions: Section 16601, which permits the seller of a business to agree to refrain from carrying on a similar business; Section 16602, which enables partners to covenant not to carry on a similar business within a specified geographic area; and Section 16602.5, which extends a similar right to members of a limited liability company. See Edwards, 47 Cal. Rptr. 3d at 795-96. The statute makes clear that

16

these exceptions are exclusive: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Cal. Bus. & Prof. Code § 16600 (emphasis added); see also Bosley Med. Group, 161 Cal. App. 3d at 288. 4 Despite this statutory framework, and the Court of Appeal's recognition that '''the presence of express [statutory] exceptions ordinarily implies that additional exceptions are not contemplated,'" Edwards, 47 Cal. Rptr. 3d at 801 (quoting People v. Standish, 38 Cal. 4th 858, 870 (2006)), the court abandoned this principle. Because it adopted a broad, absolutist construction of Section 16600, in order to account for the contrary case law, the court was compelled to recognize judicially-created "exceptions" to Section 16600,

4

What the statute outlaws is a contract in which: "anyone is restrainedfrom engaging in a lawful profession . ..." "Restrained from" means "prevented from"; it means "precluded from"; it means "excluded from." The Legislature made clear that it meant a preclusion. If the Legislature had meant to outlaw the broader category of limits on engaging in a profession, not only a preclusion from engaging, it could have adopted any number of word choices stating that limits on engaging in a profession were meant to be forbidden. But it did not do that. The statute covers post-employment covenants that prohibit engaging in a profession (temporary as well as permanent) not limits on engaging in a profession (left to common law development). 17

penuitting non-competition agreements when necessary to protect the employer's trade secrets or when tailored to preclude solicitation of customers or raiding of employees. See Edwards, 47 Cal. Rptr. 3d at 801. Not only does the Court of Appeal's implied judicial exception approach ignore the statutory structure of express legislative exceptions, and thereby violate fundamental principles of statutory construction, but its approach is unnecessary when the statute is properly interpreted. Contractual provisions protecting an employer's trade secrets or precluding poaching of customers or employees do not prevent an employee from engaging in a lawful profession, trade or business-and, therefore, Section 16600 simply does not apply in such circumstances. Statutory or judicial "exceptions" are not needed to cover circumstances to which the statute does not apply in the fIrst instance.

b.

The case law confirms Section 16600's plain meaning that non-competition agreements are lawful unless they preclude pursuit of a business, trade or profession

Contrary to the Court of Appeal's complete ban on noncompetition agreements, this Court consistently has construed Section 16600 in keeping with its plain tenus to allow narrowly-tailored and 18

reasonable restrictions on competition. In Gordon v. Landau, 49 Cal. 2d 690 (1958), for instance, this Court construed a provision similar to the Non-Compete Agreement at issue in this case, and concluded that an agreement restraining an employee from soliciting former customers for one year following termination of his employment is valid, and does not violate Section 16600. Id. at 694-95. In reaching that conclusion, the Court specifically held that "[t]he contract did not restrain defendant from engaging in a lawful profession, trade or business within the meaning ofsection 16600 ofthe Business and Professions Code." Id. at 694 (emphasis added). By comparison, in Chamberlain v. Augustine, 172 Cal. 285 (1916), this Court held that an agreement that imposed a substantial penalty upon the seller of his shares in a business ifhe should engage in that business within California, Oregon, or Washington was invalid under Civil Code Section 1673, the predecessor to Section 16600. Id. at 286-88. The Court determined that the agreement effectively prohibited the seller from engaging in a lawful business, and therefore was void. Id. at 288. Because the agreement barred the seller completely from engaging in his lawful business operating a foundry within the specified geographic area, the agreement's defined

19

geographic scope and preservation of a different occupation to the seller did not render it valid. Id. at 288. Numerous intermediate appellate court decisions also recognize that Section 16600 does not invalidate all employee non-competition agreements. These include two particularly influential opinions, King v. Gerold, 109 Cal. App. 2d 316 (1952), and Boughton v. Socony Mobil Oil Co., 231 Cal. App. 2d 188 (1964).

In King v. Gerold, the court rejected a manufacturer's contention that an agreement violated Section 16600. Because the agreement did not prohibit the manufacturer "from carrying on his lawful business of manufacturing trailers but ... barred [him] merely from manufacturing and selling trailers of the particular design and style invented by respondent," it did not entirely prohibit the manufacturer from engaging in his trade or business, and hence did not violate the statute. 109 Cal. App. 2d at 318.

In Boughton, the court rejected plaintiffs' contention that a restriction upon the use of a parcel of land as a service station violated Section 16600, concluding that "under this restriction the [plaintiffs] are not prevented from dispensing petroleum products and operating a service station at any time at any other place and there directly

20

competing with defendant." 231 Cal. App. 2d at 190-91. The restriction did not even fall within the scope of Section 16600 because it did not bar the plaintiffs' ability to carry on their profession, business or trade: While the cases are uniform in refusing to enforce a contract wherein one is restrained from pursuing an entire business, trade, or profession, as falling within the ambit of section 16600, where one is barredfrom pursuing only a small or limited part ofa business, trade or profession, the contract has been upheld as valid.

Id. at 192 (emphasis added) (internal citations omitted); see also id. at 193 ("A contract restraining one from following a lawful trade or calling at all is invalid because it discourages trade and commerce, and prevents the party from earning a living, but the right to agree to refrain from a calling within reasonable limits as to space, may have contrary effect.") (emphasis added) (quoting Brown v. Kling, 101 Cal. 295,299 (1894)). Contrary to the Court of Appeal's assessment, Edwards, 47 Cal. Rptr. 3d at 800-801, Boughton is no less persuasive merely because the restriction involved plaintiffs' use of land. The form in which an agreement not to compete is crafted is irrelevant. Chamberlain, 172 Cal. at 288. Nor does Boughton's reasoning conflict with this Court's

21

opinion in Chamberlain, as the Court of Appeal concluded. Id. at 801. Rather, as discussed, Chamberlain entailed a complete restriction on the seller's ability to engage in the foundry business, and thus was invalid pursuant to former Civil Code Section 1673. That the agreement permitted the seller to engage in a different occupation, including employment as a laborer in the foundry business, did not vitiate the agreement's total restriction upon the seller's ability to engage in the business of operating, owning, or managing a foundry. See Chamberlain, 172 Cal. at 288. Section 16600' s limited scope was also explained in Loral Corp. v. Moyes: [R]easonably limited restrictions which tend more to

promote than restrain trade and business do not violate the statute. Section 16600 does not invalidate an employee's agreement not to disclose his former employer's confidential customer lists or other trade secrets or not to solicit those customers. Thus, the statute invalidates an agreement penalizing a former employee for obtaining employment with a competitor, but does not necessarily affect an agreement delimiting how he can compete. 174 Cal. App. 3d 268,276 (1985) (citations omitted; emphasis added). Thus, Section 16600 simply is not the absolute prohibition on noncompetition agreements found by the Court of Appeal. See also Jones v. Humanscale Corp., 130 Cal. App. 4th 401,411 (2005) ("[A] former 22

employee's right to pursue his or her lawful occupation is not without limitation."); see also John F. Matull & Assocs., Inc. v. Cloutier, 194 Cal. App. 3d 1049, 1054 (1987) (same). The courts' interpretation of Section 16600 comports with the statute's public policy impetus: To protect employees' ability to pursue their profession or calling. Adv. Bionics Corp. v. Medtronic, Inc., 29 Cal. 4th 697, 706-07 (2002); see also Morlife, Inc. v. Perry,

56 Cal. App. 4th 1514, 1520 (1997); Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 859 (1994) (Section

16600 ensures "that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice"). The countervailing public policy, protecting employers' legitimate interests in protecting their client relationships and human capital, also warrants protection. See Gordon v. Landau, 49 Cal. 2d at 694 ("Plaintiffs' preferred customers are a real asset to their business and the foundation upon which its success, and indeed its survival, rests"). This Court's discussion in the analogous attorney context recognizes employers' compelling interests in protecting client relationships, as did the Legislature with its broad exception in Section 16602. See Howard v. Babcock, 6 Cal. 4th 409,420 (1993)

23

(non-competition agreements "address important business interests" including firms' and businesses' "interest in the continued patronage of its clientele"; "[t]he firm's capital finances the development of a clientele and the support services and training necessary to satisfactorily represent the clientele.") (citing Stephen E. Kalish,

Covenants Not to Compete and the Legal Profession, 29 St. Louis U. L.J. 423, 438 (1985)).5 Recognizing the legitimacy of such interests, the courts thus have upheld restrictions upon an individual's solicitation of his former employer's clients or customers, or "raiding" his former employer's ranks by soliciting away other employees. See, e.g., Loral Corp., 174 Cal. App. 3d at 276; Golden State Linen Serv., Inc. v. Vidalin, 69 Cal. App. 3d 1, 9 (1977) (non-competition agreement enforceable under Section 16600 "insofar as it provides that the affected employee will not solicit [the employers'] customers after leaving its employ,,).6

5

As this Court noted in Howard v. Babcock, the protection afforded businesses by Section 16602 is so extensive that virtually absolute restrictions on competition are permitted in the context of a transfer of partnership interests. See 6 Cal. 4th at 416 (noting that Section 16602 has justified enforcing broad covenants not to compete among partners). 6 The Court of Appeal essentially ignored these cases, observing only that because Edwards did not challenge the non-solicitation 24

The courts also enforce restrictions protecting an employer's trade secrets. See, e.g., D'Sa v. Playhut, Inc., 85 Cal. App. 4th 927, 935 (2000) ("[A] covenant not to compete will not be viewed as a violation of section 16600 if it is necessary to protect the employer's trade secrets ...") (internal quotation omitted); Metro Traffic Control, Inc., 22 Cal. App. 4th at 859. In sum, Section 16600 prohibits only broad agreements that prevent a person from engaging entirely in his chosen business, trade or profession. Agreements that do not have this broad effect-but merely regulate some aspect of post-employment conduct, e.g., to prevent raiding-are not within the scope of Section 16600. When viewed thusly, unauthorized judicially-created "exceptions" are unnecessary, and the statutory exceptions govern, as intended. 7

provisions of the Agreement, it was not necessary to consider the issue. Edwards, 47 Cal. Rptr. 3d at 797, nA. As numerous commentators have observed, this approach best balances the competing concerns of employees' interests in continued opportunities for employment, with the substantial policy concerns of businesses to protect their investment in human capital, customer relationships and proprietary information. See, e.g., Norman D. Bishara, Covenants Not to Compete in a Knowledge Economy: Balancing Innovation from Employee Mobility Against Legal Protection for Human Capital Investment, 27 Berkeley J. Emp. & Lab. L. 287, 314-21 (2006) (arguing that in a knowledge-based employment society, public policy supports narrowly construed 7

25

While a handful of decisions broadly construe Section 16600, see Pet. for Review at 24-25, those cases do not support an absolute prohibition on non-competition agreements. For example, Muggill v.

noncompete agreements allowing employers to protect valuable proprietary information, particularly in professional services arena); see also id. at 296 (noting that states' regulation of non-competition agreements is highly relevant to businesses' success "because the value of many oftoday's companies, particularly high-tech companies and other knowledge-based industries, is tied up in the creative services provided by the human capital of their employees, not by physical assets that can be owned, sold, or leveraged"); Michael J. Garrison, Limiting the Protection for Employees from Compelled Noncompete Agreements Under State Whistleblower Laws: A Critical Analysis afMaw v. Advanced Clinical Communications, 20 Lab. Law 257, 259 (2005) ("Businesses have a legitimate interest in preventing unfair competition by former employees who may seek to improperly use proprietary business information or unfairly take advantage of customer loyalties."); Note, Where Have You Gone, Law and Economics Judges? Economic Analysis Advice to Courts, etc., 66 Ohio St. L.J. 1105,1106,1128-30,1152 (2005) (arguing against blanket rules and discussing the rising importance and use of covenants not to compete to protect human capital and customer relationships); William G. Porter II & Michael C. Griffaton, Using Noncompete Agreements to Protect Legitimate Business Interests, 69 Def. Couns. J. 194,195-96 (2002) (because all companies have confidential and proprietary information that inevitably falls outside the parameters of the "trade secret" definition, "[n]oncompete and confidentiality agreements may protect not only trade secrets but also privileged, proprietary, and confidential information that would not qualify as a trade secret," such as customer relationships, loss of key employees, and proprietary business knowledge); Eric A. Posner & George G. Triantis, Covenants Not to Compete From an Incomplete Contracts Perspective, (John M. Olin Working Paper Series, No. 137, 2D Series, 2001), available at http://www.law.uchicago.edu/ Lawecon/index.html (last visited Jan. 19,2007) (arguing that noncompete agreements can be economically efficient). 26

Reuben H. Donnelley Corp., 62 Cal. 2d 239,242-43 (1965), held that

an agreement precluding an employee's future employment by a competitor was an absolute prohibition on his pursuit of a profession, trade or business and therefore within Section 16600. 8 Gordon Termite Control v. Terrones, 84 Cal. App. 3d 176, 178 (1978),

unquestioningly followed Muggill, without discussing Gordon v. , Landau, to invalidate an agreement, unlimited as to time, prohibiting a

salesman from calling on his former accounts. Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 (2003), invalidated an agreement

prohibiting solicitation of former customers by improperly reading Gordon v. Landau solely as a trade secret case, which it is not, and by

minimizing Loral's ruling that agreements not to solicit former customers were valid. Id. at 1429-30. These cases are irreconcilable with the wealth of well-reasoned, contrary authority, and they do not meaningfully analyze the statutory language discussed above, or the Ninth Circuit precedent and legislative history discussed below.

8

By comparison, the Andersen Non-Compete Agreement imposed no penalty whatsoever for obtaining employment with a competitor. See App. 1275. See also Int 'I Bus. Mach. Corp. v. Bajorek, 191 F.3d 1033, 1041 (9th Cir. 1999) (distinguishing Muggill as inapplicable when agreement contains only limited restraints). 27

c.

The Ninth Circuit's "narrow restraint" doctrine correctly interprets Section 16600

Contrary to the Court of Appeal's erroneous conclusion,

Edwards, 47 Cal. Rptr. 3d at 803, the Ninth Circuit's interpretation, which views Section 16600 as inapplicable to employment agreements that are "narrow restraints" on trade, is not "a misapplication of California law," but accurately reflects the scope of Section 16600. Tellingly, as with the California case law discussed above, the Ninth Circuit's reading has stood for many years without prompting any suggestion from the Legislature that this interpretation IS

erroneous. The Ninth Circuit's reading rests on this Court's decision in

Gordon v. Landau, as well as the court of appeal decisions in Boughton v. Socony Mobil Oil Co. and King v. Gerold. Following the California courts' lead, the Ninth Circuit has invalidated covenants not to compete only to the extent they prohibit an employee from engaging in his or her line of work: Section 16600 only makes illegal those restraints which preclude one from engaging in a lawful profession, trade, or business.

Campbell, 817 F.2d at 502 (emphasis added).

28

The courts of the Ninth Circuit consistently have applied this rule, holding in multiple cases that Section 16600 has no application to non-competition agreements unless the agreement in question precludes a party from pursuing his or her trade or business. See Int 'l

Bus. Mach. Corp., 191 F.3d at 1040 (limited restriction precluding employee from working for competitor in order to retain stock options was a valid restraint outside the scope of Section 16600); Gen.

Commercial Packaging, Inc. v. TPS Package Eng'g, Inc., 126 F.3d 1131, 1133 (9th Cir. 1997); accord Merrill Lynch, Pierce, Fenner &

Smith Inc. v. Chung, 2001 WL 283083 at *6 (C.D. Cal. 2001) (enjoining former employees from soliciting and accepting business from Merrill Lynch clients whose accounts they serviced, following

Boughton); Baskin-Robbins Inc. v. Patel, 264 F. Supp. 2d 607,610 (N.D. Ill. 2003) (construing California law) (Boughton would permit limited restrictions that do not preclude employee from "entire" business or profession as contemplated by Section 16600).

In General Commercial Packaging, Inc. v. TPS Package Engineering, Inc., for instance, the plaintiff subcontracted with defendant TPS Package Engineering to package materials for transport to plaintiffs customer, Disney. 126 F.3d at 1132. TPS

29

signed a contract agreeing not to solicit or deal directly with Disney "or any other company which [General Commercial] has introduced to and contracted with TPS to perform ... subcontracting services," during the term of the contract and for one year after its termination.

Id. at 1132. Applying California law, the Ninth Circuit held the contract, which only narrowly restricted TPS's access to the packaging and shipping market, was valid: "[S]ection 16600 does not impair General Commercial's contract with TPS unless it entirely precludes TPS from pursuing its trade or business." Id. at 1133.

In contrast, agreements that effectively prevent or preclude an employee from engaging in his or her line of work or business are within the scope of Section 16600 and therefore prohibited, unless excepted by statute. See, e.g., Latona v. Aetna Us. Healthcare Inc., 82 F. Supp. 2d 1089, 1094-96 (C.D. Cal. 1999) (restrictions that prohibited employment by any competitor indefinitely and from contacting approximately 15,000 physicians effectively prohibited them from practicing their profession).

30

d.

The legislative history of Section 16600 confirms the intent to bar only prohibitions on engaging in a business, trade or profession

At common law, non-competition agreements, including restraints on the practice of a profession, were valid if reasonable. See

Wright v. Ryder, 36 Cal. 342, 358 (1868) ("[A]n agreement in partial restraint of trade, restricting it within certain reasonable limits or times, or confining it to particular persons, would, if founded upon a good and valuable consideration, be valid."); see also Hill Med. Corp.

v. Wycoff, 86 Cal. App. 4th 895, 900-901 (2001); Vacca Indus., Inc. v. Van Den Berg, 5 Cal. App. 4th 34, 47-48 (1992). In 1872, upon the enactment of the Civil Code, including Section 1673, California supplemented this common law "rule of reasonableness" with a statutorily-defined standard. 9 The rule of reason generally remains the law on noncompetition agreements (as discussed below); however, California courts disagree as to whether the reasonableness standard retains 9

Civil Code Section 1673, the predecessor to Business & Professions Code Section 16600, provided: Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, otherwise than is provided by the next two sections, is to that extent void. Cal. Civ. Code § 1673 (1872). 31

vitality after the enactment of the Civil Code. Compare Hill Med.

Corp., 86 Cal. App. 4th at 901 ("California codified its public policy and rejected the common law 'rule of reasonableness' in 1872, upon the enactment of the Civil Code."); and Bosley Med. Group, 161 Cal. App. 3d at 288 ("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, the so-called rule of reasonableness was rejected by this state in 1872 (internal citations omitted); with Vacco Indus., 5 Cal. App. 4th at 47 (Section 16600 is a "codification[] of the common law and [is] to be construed and interpreted reasonably in light of the common law decisions on the same subject."); South Bay Radiology Med. Assocs. v. Asher, 220 Cal. App. 3d 1074, 1080 (1990) ("Section 16600 embodies the common law prohibition against restraints on trade."). Accord Centeno v.

Roseville Cmty. Hosp., 107 Cal. App. 3d 62, 69 (1979) ("Where, as here, there is no express intent to depart from, alter, or abrogate the common law rules, a statute purporting to embody such doctrine or rules will be construed in light of common law decisions on the same subject."); Saala v. McFarland, 63 Cal. 2d 124, 130 (1965) ("Statutes

32

are not presumed to alter the common law otherwise than the act expressly provides."). This Court has recognized the ongoing relevance of the common law, at least as concerns the scope of related Section 16602.

See Howard, 6 Cal. 4th at 416 ("We have held that the common law 'rule of reason' should apply to evaluate the noncompetition agreement under Business and Professions Code section 16602.");

Swenson v. File, 3 Cal. 3d 389,396 (1970) ("We may assume that in enacting former section 16602 the Legislature intended to embody the common law concept of reasonableness.") (internal citation omitted). 10 Regardless of the difference of opinion, the history of this enactment reveals that the Legislature did not intend to prohibit all non-competition agreements, particularly "reasonable" ones previously upheld at common law, but at most intended to curtail the

10

Indeed, it seems unlikely that the California Legislature intended to change common law on covenants not to compete because its enactment of Civil Code Section 1673 was merely part of a large undertaking to codify existing California law into four different codes, including civil, civil procedure, criminal and political codes. Section 1673 was included as one of hundreds of sections in Senate Bill 430, "An Act to Establish a Civil Code," adopted in 1872. Section 16600, passed in 1941, as Senate Bill 360, Ch. 526, is virtually identical to Section 1673. 33

use of unreasonable restraints on trade barring an individual from engaging in his trade or business. Citing Dunlop v. Gregory, 10 N.Y. 241 (1851), and California Steam Navigation Co. v. Wright, 6 Cal. 258 (1856), the Code Commissioner's notes reflect the Legislature's concern that a New York court had validated an agreement entirely precluding the operation of a business on a portion of the Hudson River without consideration to "avoid competition," and a California court, although mandating that consideration be paid, had permitted an agreement that prohibited an individual from exercising a lawful trade over an entire line of travel. See Cal. Civ. Code § 1673 (1872), Commissioner's Note. In response to this concern, the Legislature expressly provided that agreements effectively barring an individual from exercising a lawful trade are per se unreasonable and thus prohibited. See Cal. Civ. Code § 1673 (1872). Critically, however, confirming that the Legislature intended to maintain the fundamental common law permitting reasonable restraints, and narrowly-tailored covenants not to compete, the Code Commissioner wrote: "By the terms of this section ... , the restraint to be imposed would seem to be obliged to be limited to a specified county; and to this effect, also, are the cases

34

of Wright v. Ryder, 36 Cal., p. 342, and Moore vs. Bonnet, 40 Cal., p.

251." Id. (emphasis added). Thus, the Code Commissioner's annotated comments specifically approve and adopt certain common law decisions, which recognize reasonable restraints, and which form the basis for the rule codified. 11 The legislative history thus confirms that each side of the debate is correct: In enacting Section 1673, the Legislature did supplant the common law, to the extent that it had authorized unreasonable restraints of trade precluding a party from pursuing his vocation. As important here, however, the Legislature also expressly maintained the common law in that narrowly-tailored and reasonable covenants not to compete remain valid.

11

As noted above, Wright v. Ryder, 36 Cal. 342, 358 (1868), held that "an agreement in partial restraint of trade, restricting it within certain reasonable limits or times, or confining it to particular persons, would, if founded upon a good and valuable consideration, be valid." Moore v. Bonnet, 40 Cal. 251, 254 (1870), held that a covenant precluding the exercise of a business throughout the entire state is void, and could not be saved by construing it as limited only to San Francisco since it was not a severable agreement; accordingly, it failed as an unreasonable restriction. See also Brown v. Kling, 101 Cal. 295, 299 (1894) (upholding covenant not to compete limited to a radius within five miles of the city for three years; "At common law such a contract would have been valid.") (quoted with approval in Boughton, 231 Cal. App. 2d at 193). 35

e.

Out-of-state authority supports tailored competitive restraints protecting customer relationships

Finally, authority from other jurisdictions calls into question the Court of Appeal's analysis. The court's absolute prohibition on employee non-competition agreements is almost unprecedented. Rather, consistent with the desire to balance legitimate business interests (such as preserving client relationships and human capital) with employee mobility, the overwhelming majority of states permit reasonable restrictions on post-employment activities by former employees. See generally 54A Am. Jur. 2d, Monopolies, § 888 (2006) ("In the majority ofjurisdictions, postemployment covenants not to compete, being in partial restraint of trade ... are usually enforceable if they are reasonably necessary to protect an employer's legitimate business interests, without imposing undue hardship on the employee ...."); R. P. Davis, Annotation, Validity and enforceability of restrictive covenants in contracts of employment, 98 A.L.R. 963 (1935) (collecting cases); 17A C.J.S. Contracts, § 249 (2006) ("As a general rule, an agreement in unreasonable restraint of trade is illegal and void, but an agreement in reasonable restraint of trade is valid.").

36

In fact, three of the four states that employ nearly identical statutory language to Section 16600-Alabama, Montana and Oklahoma-all permit employee non-competition agreements which do not preclude the employee from engaging in his or her trade or profession. The courts of each of these states have interpreted their respective statutory provisions 12 to prohibit only agreements that entirely preclude individuals from exercising their vocation, thus leaving other non-competition agreements beyond the scope of any statutory prohibition. See Ex parte Howell Eng 'g & Surveying, Inc., 2006 Ala. LEXIS 346 (Ala. Dec. 15, 2006); Dobbins, DeGuire & Tucker,

Pc.

v. Rutherford, MacDonald & Olsen, 708 P.2d 577,579

(Mont. 1985). Accord Mont. Mountain Prods. v. Curl, 112 P.3d 979, 982 (Mont. 2005) (covenant not to compete prohibiting plaintiff from practicing her trade was an unlawful restraint); Cardiovascular Surgical Specialists, Corp. v. Mammana, 61 P.3d 210,214-15 (Okla. 2002) (non-compete agreement prohibiting former employee from practicing cardiovascular or thoracic surgery within a radius of 20

12

See Ala. Code. § 8-1-1 (2006); Mont. Code Ann. § 28-2-703 (2006); Okla. Stat. tit. 15, § 217 (2006). 37

miles for two years was unreasonable restraint because doctoremployee was effectively barred from his profession). 13 More to the point, non-California cases evaluating postemployment restrictions applicable specifically to accounting professionals have upheld narrowly-tailored restrictions. akin to those at issue here, in recognition that professional service relationships warrant particular solicitude for the former employer's interests. Dobbins, 708 P.2d at 579; see also BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1225-26 (N.Y. 1999) (restrictive covenant valid to the extent it could be construed only to prohibit accountant from retaining clients of the firm whom he had serviced); Thompson, Breeding, Dunn, Creswell & Sparks v. Bowlin, 765 S.W. 2d 743, 746 (Tenn. App. 1987) (covenant by which accountant agreed not to work for any

13

Michigan's similar statute, Mich. Compo Laws Ann. § 445.761, also permits covenants not to compete that do not preclude a former employee from pursuing his vocation. See, e.g., Merrill Lynch, Pierce, Fenner & Smith Inc. v. Ran, 67 F. Supp. 2d 764 (E.D. Mich. 1999) (agreement by broker not to solicit brokerage firm's clients for one year after termination enforceable because it did not preclude him from pursuing his vocation). Research suggests that North Dakota is the only state with similar statutory language to adopt a sweeping prohibition on non-competition agreements comparable to that announced by the Court of Appeal in this case. See Warner & CO. V. Solberg, 634 N.W.2d 65, 71-72 (N.D. 2001); Werlinger v. Mut. Servo Cas. Ins. Co., 496 N.W.2d 26,28-29,30 (N.D. 1993). 38

of employer's clients for three years was enforceable); Perry v.

Moran, 748 P.2d 224,230-31 (Wash. 1987), modified on other grds., 766 P.2d 1096 (Wash. 1989) (covenant enforceable where accounting firm had legitimate interest in protecting client base from depletion by former employee). These cases recognize that, particularly in professions such as accounting, where personal service relationships form the core of the business, employee poaching of clients can be an unfair business practice. BDO Seidman, 712 N.B. 2d at 1225 (discussing employer's legitimate interest in protecting against former employee's competitive use of client relationships which employer had enabled him to acquire); Perry, 748 P.2d at 229 (employer "has a legitimate interest in protecting its existing client base from depletion by a former employee" and "a justifiable expectation that if it provided employment to an accountant, that employee would not take its customers."); Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill. App. 3d 146, 153 (2001) (non-competition agreement protected employer's "legitimate interest in protecting its long-standing client relationships without interference from its former employees"); Wolf & Co. v.

Waldron, 366 N.E. 2d 603, 606 (Ill. App. 1977) ("The protection of

39

this asset [the employer's clientele] is recognized as a legitimate interest of an employer."). In sum, should this Court look for guidance to the law of other states, including those with similar statutory schemes and those evaluating constraints on accounting professionals, that law confirms that narrow restraints like those at issue here are lawful.

2.

The Court Of Appeal Erred In Concluding That The Non-Compete Agreement Was Unlawful

As shown, Section 16600 does not prohibit all non-competition agreements. Instead, whether such an agreement falls within the scope of Section 16600 in the first instance requires an examination of the particular restriction imposed. Here, neither of the limited restrictions placed upon Edwards implicates Section 16600. 14

14

Contrary to Edwards's assertion in the Court of Appeal, AOB at 51, the validity of the Non-Compete Agreement is a question oflaw, subject to resolution via summary adjudication or, as here, by bench trial with the court ruling as a matter oflaw. See, e.g., Latona, 82 F. Supp. 2d at 1093. Moreover, to the extent that certain facts must be known to evaluate the validity of the Agreement, such facts are disclosed by the record and are not in dispute. See RT 177:10-12. 40

a.

The first restriction in the Agreement was lawful

The first restriction Edwards challenges read: If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. App. 1275 (emphasis added). This provision restricted Edwards from performing tax accounting services for particular clients (those he serviced during the 18 months before leaving Andersen) for a defined period of time (18 months after leaving). The total impact of this provision on Edwards's continued practice of his profession was limited and undisputed: Edwards serviced only approximately 14 clients consisting of approximately 35 matters in 2002; during 2001 and 2002, he worked on an estimated 50 matters. See App. 665, 899. The Agreement prohibited Edwards only from servicing these few clients for a limited time. Moreover, the Agreement permitted Edwards to practice in his profession (accounting), in his area of specialty (tax accounting), and even in his area of subspecialty (tax accounting for high net worth

41

individuals). Merely restricting Edwards temporarily from servicing a tiny group of former Andersen clients did not prevent or preclude him from engaging in his profession. As Edwards admitted in his deposition, "there is enough business" in Los Angeles of the type he performed "to go around all the different C.P.A. firms." See id. at 620-21. 15 Indeed, the trial court confirmed the breadth of this market, finding it "a pretty significant fact," RT 177: 14-20, and concluding that as a result, "there wasn't any significant restriction on [Edwards's] ability to work. There wasn't even perhaps any minimal

restriction on his ability to work." RT 176:7-9 (emphasis added). Finally, the Agreement permitted Edwards to seek and/or obtain employment with any Andersen client or former client immediately upon leaving Andersen, without penalty. Such a narrow restriction, which indisputably left the vast majority of the market available to Edwards simply does not implicate Section 16600. See Loral Corp., 174 Cal. App. 3d at 279. Indeed, this restriction is far less burdensome than the agreement upheld in Loral, which prohibited an employee entirely from disrupting the

15

After leaving Andersen, Edwards went to work for BDO Seidman, then the fifth largest accounting firm in the country. App. 1266,2025. 42

employer's business or its relationship with customers. Loral, 174 Cal. App. 3d at 274. The Court of Appeal's contrary conclusion rested on its misconstruction of the scope of Section 16600, as well as its misapplication of the very authority upon which it relied. In Morris v. Harris, 127 Cal. App. 2d 476 (1954), which the Court of Appeal read to invalidate a purportedly "similar" non-competition covenant, the restriction at issue effectively prohibited a party to an employment agreement (styled as a "lease") from soliciting or accepting business from any of the clients of the employer for a ten-year period. Id. at 477. This broad restrictive covenant barred the employee even from accepting employment from his former employer's customers "without solicitation on his part." Accordingly, as this Court held in Chamberlain, merely limiting the prohibition to a ten year period-a "partial restraint of trade"-eould not validate an otherwise invalid agreement. Id. at 476. Here, by contrast, the Agreement limited Edwards's access only to an extremely narrow segment of the tax accounting services market for a brief duration. This restriction did not prohibit Edwards from continuing to engage in his chosen profession, and as a result could

43

not fall within the scope of Section 16600. See Gen. Commercial

Packaging, 126 F.3d at 1134; see also Int'l Bus. Mach Corp., 191 F.3d at 1041 (restriction excluding former employee "from one small comer of the market but would not preclude him from engaging in his profession, trade or business" outside the scope of Section 16600).

b.

The second restriction in the Agreement was lawful

Edwards also claims that Section 16600 invalidates the second restriction, which provided: For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation. App.1275. This restriction simply prohibited Edwards from raiding clients of Andersen's Los Angeles office, for a limited period of time, once he left Andersen to work for another firm. Edwards was permitted to provide any tax accounting services to any client of that or any other firm (except for the few clients he serviced while at Andersen), and to solicit as new clients anyone but clients of Andersen's Los Angeles office, and then only for one year.

44

Without question, Andersen had an investment in its client relationships which, without violating Section 16600, Andersen was entitled to protect with this anti-solicitation provision. See Gordon, 49 Cal. 2d at 694 (agreement prohibiting employee from soliciting former employer's customers for one year is enforceable under Section 16600); Loral Corp., 174 Cal. App. 3d at 276 ("Section 16600 does not invalidate an employee's agreement not to disclose his former employer's confidential customer lists or other trade secrets or not to solicit those customers"); Golden State Linen Serv., 69 Cal. App. 3d at 9 (non-compete provision enforceable under Section 16600 "insofar as it provides that the affected employee will not solicit Golden State's customers after leaving its employ").

*

*

*

The Court of Appeal's decision could be reached only by judicially amending Section 16600 and ignoring a wealth of precedent. Agreements that merely impose narrow restraints upon post-employment conduct, but permit the pursuit of one's chosen field, do not violate Section 16600. The Court should have affirmed the trial court's decision, finding the narrow restrictions in the NonCompete valid.

45

B.

Contrary To The Court Of Appeal's Decision, The TONC Is A Lawful, Standard Form Release As discussed above, when Andersen sold portions of its Los

Angeles tax practice to HSBC, HSBC required all former Andersen employees, as a condition of employment with HSBC, to be released from any restrictive covenants, including the Non-Compete Agreements signed by managers. App. 390, 539, 686-87. To accomplish such releases, Andersen utilized the TONC, which included a standard release of "any and all" claims the employee might have against Andersen, except for "claims ... for any accrued and unpaid salary or other employee benefit or compensation owing to Employee as of the date hereof." App.579.

In a ruling that stretched to find illegality where none exists, the Court of Appeal held the TONC to be unlawful and an independently wrongful act for purposes of tort liability. Remarkably, the court found that the TONC waived Edwards's employee indemnification rights, even though the TONC makes no reference to indemnification rights. In the face of this silence, the court strained to create illegality by importing into the agreement a term that was neither expressed nor intended, which term the court found rendered the agreement unlawful. Even more incomprehensibly, the term the court 46

imported-a waiver of employee indemnification rights-is impermissible under Section 2802, and null and void as a matter of law under Section 2804. Not only does the Court of Appeal's ruling contravene Sections 2802 and 2804, and the principle that contracts incorporate all applicable laws, which are presumed to be known by the parties, but the court's approach flouts fundamental principles of contract interpretation-which decline to imply terms not written, and interpret agreements to be lawful, not unlawful. The Court of Appeal's rule also creates absurd and unworkable results: for a standard form release of "any and all" claims to be lawful, it must explicitly set out and preserve unwaivable rights. 1.

Under The Labor Code, The TONC Release Provision Could Not Waive Employee Indemnification Rights

California has a strong public policy favoring employer indemnification of employees for claims and liabilities resulting from the employees' acts within the course and scope of their employment. Justice Ming W. Chin, et al., California Practice Guide: Employment Litigation ,-r 3: I (The Rutter Group 2005). Section 2802 codifies that public policy, stating in pertinent part, "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred 47

by the employee in direct consequence of the discharge of his or her duties...." Cal. Lab. Code § 2802. Section 2804 provides fail-safe protection for employee indemnification rights, holding that "[a]ny contract or agreement ... made by any employee to waive the benefits of this article or any part thereof [including indemnification under Section 2802], is null and void...." Cal. Lab. Code § 2804. Thus, by law, employee indemnification rights are unwaivable, regardless of the language used in employment contracts or other agreements. Notwithstanding the clear statutory framework protecting employee indemnification rights, the Court of Appeal held that the TONC was unlawful because the standard release provision in the agreement, waiving "any and all" claims, could be read to waive Edwards's indemnification rights under Section 2802. Edwards, 47 Cal. Rptr. 3d at 807. Although the TONC did not reference unwaivable indemnification rights (or any other unwaivable rights)let alone purport to waive such rights-the Court of Appeal read an implied waiver into the TONC. Id. ("The provision did not expressly

reference indemnity rights, but ... [t]hey were necessarily encompassed within the ... broad release.").

48

That approach was erroneous. An ancient and inviolate principle of California law is that "all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated." City of Torrance v. Workers' Camp. Appeals Bd., 32 Cal. 3d 371,378 (1982) (internal quotations and citations omitted). Thus, Section 2802 could not have been waived by the agreement-they formed a part of its terms. While the Court of Appeal expressed concern about Edwards's hypothetical ignorance of these statutes enacted for his benefit, "the parties are presumed to know and to have had in mind" the law, and there is no reasoned or useful basis for departing from this rule on an ad hoc basis because of the possible lack of sophistication of one of the contracting parties. Baker Pacific Corp. v. Suttles, 220 Cal. App. 3d 1148, 1159 (1990) (Peterson, J., dissenting). As Justice Peterson's cogent dissent notes, implying a waiver of nonwaivable rights in broad release language due to the potential ignorance of a contracting party creates endless mischief: This reasoning, I respectfully submit, posits without precedent a strange and murky doctrine in 49

contract analysis. It means this: A release, to avoid invalidation on public policy grounds the majority asserts, must literally set forth and exclude from its effects acts already so excluded by operation of law ... if the releasor lacks the "sophistication" or "bargaining strength" of the releasee, and arguably cannot therefore be deemed to understand the principle of incorporation [of law] ... , and its legal effect on, all releases in this state. Carried to its logical extension, such reasoning would compel similar revision of all contracts to include literally all relevant portions of the Civil Code of this state, affecting that contract and now deemed incorporated therein. The test of the parties' relative "sophistication" as a trigger of that result would remain a subject of repeated factual dispute in each case. Traditional rules of contract interpretation, incorporating applicable statutes therein as a matter of law, would be effectively abolished. The question of whether a relevant statute is incorporated by law in a contract of release would become uncertain at best, unknown at worst. If from case to case the relative "sophistication" and business acumen of releasors and releasees varies, literal inclusion of the relevant statute would be required at the peril and risk of the release being found invalid. No incorporation by law of the terms of a statute in a release could be safely assumed by any drafting lawyer under these circumstances; and the complexity of, and litigation concerning, legal draftsmanship and the legal effect of releases would thereby be sharply and unnecessarily heightened.

50

Id. at 1163-64 (emphasis in original). The present case provides an object lesson on the wisdom of Justice Peterson's view. 16 Indeed, the Court of Appeal here fell into precisely the trap predicted by Justice Peterson, distinguishing releases applicable to hypothetically "ignorant" employees from other contracts, without support in law. The court concluded that employers are better situated than employees to bear the burden of drafting releases that comply with the law. Edwards, 47 Cal. Rptr. 3d at 809-10. Noticeably absent from the Court of Appeal's opinion is a recognition that the

Legislature already provided adequate protection for employee indemnification rights through the enactment ofLabor Code Section 2804-making any attempted waiver of such rights null and void. Cal. Lab. Code § 2804. Through its nullifying language, Section 2804 provides absolute protection for employee

16

While the Court of Appeal relied upon Baker, that decision does not control this case. As the majority opinion notes, the releasee in Baker was seeking to uphold a broad release proscribed by statute (Civil Code Section 1668) on the theory that a party could contract to contravene statutory proscriptions. 220 Cal. App. 3d at 1153. Here, Andersen had no intent to seek a waiver of Edwards's unwaivable, indemnity rights, and is not attempting to do so through litigation. Andersen was attempting to follow the law, which it believed was incorporated into its agreement with Edwards under the authority cited above. The majority opinion in Baker is inapposite. 51

indemnification rights, and puts both employers and employees on notice of the consequences of any attempt to waive them. Given Section 2804, the Court's policy rationale is superfluous and unconvmcmg. Moreover, because any purported waiver of Edwards's right to indemnification would be ineffective as a matter of law, the TONC could not have effected such a waiver. As noted, Section 2804 provides that "[a]ny contract or agreement ... made by any employee to waive the benefits of this article or any part thereof [including indemnification under Section 2802], is null and void[.]" Cal. Lab. Code § 2804 (emphasis added). The terms "null" and "void" mean to have "no legal effect," but they do not mean wrongful or unlawful. See Black's Law Dictionary 1098, 1604, 1644 (8th ed. 2004) (defining "null" and "void" as having "no legal effect," and "wrongful" as "[c]ontrary to law; unlawful"). The Court of Appeal itself acknowledged the distinction between a "void" act that has no legal effect and an act that is "wrongful" and therefore punishable, but failed to come to the obvious conclusion that tort liability should not attach to the former as applied to the facts of this case. In rejecting Edwards's contention

52

that the TONC was an independently wrongful act because it violated Labor Code Section 432.5,17 the Court of Appeal distinguished Section 432.5-a penal statute-from Section 2804, which merely renders a contract purporting to waive indemnification rights "null and void," rather than criminally wrongful. Edwards, 47 Cal. Rptr. 3d at 809, n.IO. However, despite adopting the legal definition of "void" as meaning "of no legal effect," the court nevertheless held that the "ineffective" release that it implied in the TONC constituted an independently "wrongful" act for purposes of establishing tort liability. In so doing, the court ignored the legislative intent behind assigning punishment under one scenario (Section 432.5), and merely providing protection for employee rights under another (Section 2804). Moreover, the Court of Appeal's opinion is internally inconsistent in that it ignores its own admonition to construe the terms of a statute "in their statutory context." Edwards, 47 Cal. Rptr. 3d at

17

Labor Code Section 432.5 provides: ''No employer, or agent, manager, superintendent, or officer thereof, shall require any employee or applicant for employment to agree, in writing, to any term or condition which is known by such employer, or agent, manager, superintendent, or officer thereof to be prohibited by law." Cal. Lab. Code § 432.5. 53

800. When the statute is viewed "in context," the Labor Code specifies exactly what employer actions are unlawful or prohibited and what punishment, if any, shall be imposed. For example, Labor Code Section 206.5 provides: No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made. Any release required or executed in violation of the provisions of this section shall be null and void as between the employer and the employee and the violation of the provisions of this section shall be a misdemeanor. Cal. Lab. Code § 206.5 (emphasis added). This section and numerous other Labor Code provisions prohibit certain wrongful conduct and impose various levels of punishment for violations, making clear that when the Legislature meant to make an employer's conduct unlawful, it knew exactly how to do

SO.I8

By comparison, no provision ofthe Labor Code punishes or

criminalizes an employer for requiring the execution ofa release 18

See, e.g., Cal. Lab. Code § 215 ("Any person, or the agent,

manager, superintendent or officer thereof, who violates any provision ... is guilty of a misdemeanor."); § 225.5 (b) ("For each subsequent violation, or any willful or intentional violation, two hundred dollars ($200) for each failure to pay each employee, plus 25 percent of the amount unlawfully withheld"); § 354 ("Any employer who violates any provision of this article is guilty of a misdemeanor, punishable by a fine not exceeding one thousand dollars ($1,000) or by imprisonment for not exceeding 60 days, or both"). 54

that purports to waive indemnification rights. Instead, Section 2804 simply makes such a waiver "null and void," or ineffective. There is no Labor Code violation, and therefore no punishment, associated with such conduct. Thus, although Andersen's commercially standard release did not purport to waive Section 2802 indemnification rights or any other legally unwaivable right, even if it had, requiring execution of the release was not wrongful as a matter oflaw. As the trial court correctly held, "[T]he Labor Code pretty much tells us that right can't be waived. As a matter oflaw, any provision in the release that attempts to waive it would be void. . .. [T]he TONC is not illegal." See RT 174, 178.

2.

The Court Of Appeal's Interpretation Of The TONC Violated Fundamental Tenets Of Contract Interpretation a.

The Court of Appeal improperly implied a waiver of employee indemnification rights where none existed

Under California law, the interpretation of any contractincluding an employment contract-must begin with its express terms. Cal. Civ. Code § 1638 ("The language ofa contract is to govern its interpretation."); Sierra Vista Reg '[ Med. etr. v. Bonta, 107 Cal. App. 4th 237,245-46 (2003) (examining words of contract as

55

first step in interpreting intentions of parties); Brandt v. Lockheed Missiles & Space Co., 154 Cal. App. 3d 1124, 1129-30 (1984) (looking to express terms of employment contract in interpreting agreement). When analyzing a contract, a court's only task is to ascertain what is contained therein, and courts are "not to insert what has been omitted, or to omit what has been inserted." Cal. Civ. Proc. Code § 1858. The release provision in the TONC did not, by its terms or by implication, purport to waive Edwards's indemnification rights, or any other rights that are made unwaivable as a matter oflaw. This absence of any express waiver of indemnification rights led the trial court to find the release valid and enforceable: On the issue of the waiver of indemnity, the release is a typical broad release. It doesn't specifically anywhere request that that right be waived... I don't interpret the release to be requiring Mr. Edwards to give up his rights as a matter of law. RT 174.

The trial court followed the maxim set forth in Section 1858, interpreting the instrument as written, and refraining from inserting that which had been omitted.

56

By contrast, the Court of Appeal interpreted the release to effectuate a legally impossible waiver. By reading in a term not there, and holding that the TONC impliedly waived unwaivable rightswith nothing in the release to suggest that Andersen sought to do more than waive rights that may be waived as a matter of law, as parties who use the same standard release language do every day-the court ignored established rules of contract interpretation. Reading such a waiver into the contract was error. Cal. Civ. Proc. Code § 1858.

b.

The Court of Appeal improperly read the TONC to be unlawful

Even assuming for the sake of argument that the release provision in the TONC could rationally be interpreted as creating an indemnification waiver, the Court of Appeal's approach ignored another fundamental interpretive rule: The Court of Appeal was

required-as the trial court did-to interpret the contract in such a way as to render it lawful. See, e.g., Jones v. Humanscale Corp., 130 Cal. App. 4th at 411 (when interpreting a covenant not to compete, court "must ... construe [it] to be lawful if possible"); Loral Corp., 174 Cal. App. 3d at 278 ("contract must be construed to be lawful if possible").

57

It is well established that "a contract must receive such

interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect." Cal. Civ. Code § 1643 (emphasis added). "[A]n interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful or of no effect." 1 B. E. Witkin, Summary ofCalifornia Law, Contracts § 750, p. 840 (10th ed. 2005). Because the express terms of the TONC did not purport to waive unwaivable employee indemnification rights, there were at least two possible constructions of the contract. First-and in accordance

with established rules of contract interpretation-the Court of Appeal could have agreed with the trial court and found that the TONC did not purport to waive Edwards's unwaivable indemnification rights. Alternatively, the court could have interpreted, and did interpret, the release provision to waive indemnification rights. Courts interpreting a contract susceptible to two meanings are required to choose the interpretation that renders the contract lawful.

Cal. Civ. Code § 1643. As this Court has said: "If a contract is capable of two constructions courts are bound to give such an

58

interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if that can be done without violating the intention of the parties." Rodriguez v. Barnett, 52 Cal. 2d 154, 160 (1959) (citation omitted; emphasis added); see also Cal. Civ. Code § 3541 (maxim of California jurisprudence that "[a]n interpretation which gives effect is preferred to one which makes void"); Loral Corp., 174 Cal. App. 3d at 278-79 (termination agreement prohibiting employee from interfering with his former employer's business must be construed to be lawful). California decisional law is replete with examples in which courts have invoked this interpretive rule to find contracts lawful and enforceable. See, e.g., County ofMarin v. Assessment Appeals Bd., 64 Cal. App. 3d 319, 325, 328 (1976) (in declaratory relief action, applying principles of Civil Code Sections 1643 and 3541 to construe contract provisions to make them operative and lawful). See also Byrne v. Laura, 52 Cal. App. 4th 1054,1070-71 (1997) (following rule of construction in favor of enforcement by interpreting contract to create a trust rather than an oral joint tenancy); Strong v. Theis, 187 Cal. App. 3d 913, 919, 920 (1986); S. Tahoe Gas Co. v. Hofmann Land Improvement Co., 25 Cal. App. 3d 750, 757 (1972).

59

The trial court followed established rules of contract interpretation, and found the TONC not to be illegal or unlawful. RT 178 ("And I think using the interpretation rules that I have to these [sic], the TONC is not illegal."). Likewise, the Court of Appeal easily

could (and should) have construed the release provision in the TONC to be valid, by assuming that the parties did not intend a release not expressed in the language of the contract, and that Section 2804 would have rendered void. Instead of choosing the more reasonable and lawful construction, however, the Court of Appeal reached to render the TONC unlawful by implying a release not expressed in the agreement, and one that could have no legal effect. By stretching to find an unlawful release by implication, the Court of Appeal violated yet another basic tenet of contract interpretation.

3.

The Court Of Appeal's Interpretation Of The TONC Has Far-Reaching Adverse Consequences And Leads To An Absurd Result

Implying a waiver of an unwaivable statutory right into "any and all" release language has broad negative consequences. This is form language, common to countless standard employment agreements, commercial contracts and settlements in effect across California. See generally Justice Ming W. Chin, et a!., California

60

Practice Guide: Employment Litigation, Form 16:A ("Settlement Agreement and Release") (The Rutter Group 2005) (including "any claims arising out of ... employment" within a form "General Release,,).19 Few of these agreements state the obvious: they do not release claims that as a matter of law cannot be released. But under the Court of Appeal's new rule, employers absurdly will be required to list every potentially applicable unwaivable statutory right as an exception to a standard release of "any and all" claims. There are myriad statutory rights which may not be waived as a matter oflaw. 20

19

Indeed, the trial court noted that the TONC contains a "typical" release. See RT 174 (July 21,2004). See also Jefferson v. Cal. Dep't ofYouth Authority, 28 Cal. 4th 299, 302-04 (2002) (concluding standard language releasing "all claims" in connection with settlement of workers compensation claim was enforceable). As a result, the Court of Appeal's invalidation of the release language has farreaching impact well beyond this employment dispute. Among the claims which cannot be waived are minimum wage claims under the Fair Labor Standards Act, D.A. Schulte, Inc. v. Gangi, 328 U.S. 108, 116 (1946), EEOC claims, E.E.O.c. v. Cosmair, Inc. v. L 'Oreal Hair Care Div., 821 F.2d 1085, 1090 (5th Cir. 1987), claims for wages, Cal. Lab. Code § 206.5, and countless others. See also Littlev. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1077 (2003) (Tameny claim unwaivable); County ofRiverside v. Superior Court, 27 Cal. 4th 793, 804-805 (2002) (listing some employee protections that are not waivable by contract, including Labor Code Sections 219, 365,2804,2855, and Unemployment Insurance Code Section 1342, as well as reciting numerous case law holdings as to rights which cannot be waived). See generally Ann Taylor Schwing, 2 California Affirmative Defenses § 47: 13 (2005 ed.), Rights and privileges that 20

61

Rather than promoting clarity and certainty for employees and employers, the Court's rule will inevitably transform standard releases into unnecessarily verbose contracts containing lengthy lists of exceptions. 21

may not be waived (2006) (listing rights as to which legislature has expressly provided that attempted waivers are void, including any contract by an employee to waive the benefits of Labor Code Sections 2800, et seq. and rights under Labor Code Section 2855). By contrast, at least as to some specific claims, a general release is sufficient to release such claims. See Smith v. Amedisys Inc., 298 F.3d 434,443 (5th Cir. 2002) (no requirement under Title VII or federal common law that a release specify Title VII or federal causes of action). Further, it is not always readily apparent which rights are waivable by law and which are not. For example, California Civil Code Section 3513 states that "Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement." Cal. Civ. Code § 3513. However, courts have labeled a literal construction of Section 3513 as "unreasonable," since "'it is difficult to conceive of a statutory right enacted solely for the benefit of private individuals that does not also have an incidental public benefit. ,,, Azteca Constr., Inc. v. ADR Consulting, Inc., 121 Cal. App. 4th 1156, 1166 (2004); see generally 2 Cal. Affirmative De! § 47: 13, Rights and Privileges that May Not Be Waived (2006) ("In the absence of an express statutory declaration forbidding waiver, whether a particular law serves a public purpose or private purpose is not always immediately obvious"). That some statutorily-created rights may be waived, see, e.g., County of Riverside v. Super. Ct., 27 Cal. 4th 793, 806 (2002) (police officer may waive rights under Public Safety Officers Procedural Bill of Rights Act), while waiver of other rights-such as employee indemnification rights-is presumptively void as a matter of law, creates further confusion for employers attempting to draft a release in line with the Court of Appeal's opinion. 21

62

The burden of the Court of Appeal's new rule on commerce is extraordinary and unjustified. Every party seeking to draft a lawful and effective release will be required to scour all potentially relevant code provisions and other sources of public policy to ascertain a complete list of potentially applicable unwaivable claims, which claims must then expressly be preserved. Any agreement that does not explicitly carve out every unwaivable right from a general release of "any and all" claims brings with it the substantial risk of invalidation, unlawfulness and, as in this case, potentially significant tort liability. All of this effort is unnecessary and superfluous because the rights to be preserved already are protected, both by the specific statute making such claims unwaivable by law and by the general rule that all law is incorporated into contracts.

C.

Both The Non-Compete Agreement And The TONC Were Lawful Contracts, And Therefore Cannot Form A Basis For Tort Liability To recover damages for the tort of interference with prospective

economic advantage, a plaintiff must prove that the defendant's actions were "independently wrongful," meaning "proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard." Korea Supply Co. v. Lockheed Martin

63

Corp., 29 Cal. 4th at 1153-54, 1159; Della Penna v. Toyota Motor Sales, U.S.A., Inc., 11 Cal. 4th 376,393 (1995). As the foregoing demonstrates, the Court of Appeal's holding that Andersen committed an independently wrongful act cannot be sustained. First, the Non-Compete Agreement was lawful and, therefore, its use was not an independently wrongful act. The Agreement did not run afoul of Section 16600 by preventing Edwards from engaging in his profession, business or trade, but rather imposed only two narrow restrictions, neither of which precluded Edwards from continuing to practice in his chosen field. 22 Second, the TONC also was lawful because it did not and could not waive unwaivable indemnification rights, absolutely protected by law. As the trial court correctly held, "[T]he TONC is not illegal. And so requiring [Edwards] to sign it would not violate public policy or even be coercive." See RT 178. And third, because the Non-Compete Agreement and the TONC were both lawful, asking Edwards to sign the TONC in

22

Indeed, the trial court concluded that "there wasn't any significant restriction on [Edwards's] ability to work. There wasn't even perhaps any minimal restriction on his ability to work." Edwards, 47 Cal. Rptr. 3d at 798. 64

exchange for being released from the Non-Compete Agreement could not be an independently wrongful act. 23 Because there was no unlawful act by Andersen, the Court of Appeal's opinion should be reversed, and the trial court's judgment in favor of Andersen should be reinstated. 24

V.

CONCLUSION

Without reason or necessity, the Court of Appeal has altered the statutory balance of competing interests, leaving no room for the

23

The legality of the TONC differentiates D'Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (2000), erroneously relied upon by the Court of Appeal, from this case. In D 'Sa, the agreement in question was unlawful under Section 16600 because it prohibited the employee from working for a competitor. Id. at 934-35. Accordingly, requiring the employee to sign such an unlawful agreement as a condition of employment was a violation of public policy. Id. at 931-32. Here, while Edwards needed to sign the TONC as required by HSBC, the TONC did not itself contain an unlawful provision (it merely released "any and all" claims), and it cannot be rendered unlawful because it was utilized to undo the Non-Compete Agreement, because that Agreement merely contained narrow restraints on competition, did not prohibit employment with a competitor, and therefore was valid under Section 16600, as discussed. Even if this Court were to conclude that the Non-Compete Agreement and/or the TONC were unlawful, thereby establishing the "wrongful act" element of Edwards's interference claim, as the court below recognized, Edwards would not necessarily be entitled to judgment. The Court of Appeal's opinion and determination dealt only with the third element of the tort. If the opinion below were affirmed in either respect, then factual issues would remain for trial. See Edwards, 47 Cal. Rptr. at 795, 804 n.7. 24

65

legitimate interests of employers in preserving their client relationships and human capital. First, with its blanket prohibition on employee non-competition agreements, the Court altered Section 16600: That section does not bar all post-employment restrictions; it does not distinguish employment relationships from other contracts; and it does not contemplate the judicially-created exceptions that are a necessary consequence of the Court of Appeal's absolute rule. Contrary to the Court of Appeal's reading, not just the statute, but a long line of precedent permits non-competition agreements that do not preclude an employee from engaging in his trade or businessagreements which are outside Section l6600's prohibitions. lfthe statute is now to be rewritten, it should be for the Legislature to decide that employers' interests in protecting their hard-won business allegiances and relationships are to be afforded no contractual protection. Equally troubling is the Court of Appeal's conclusion that an agreement such as the TONC, which is silent on employee indemnification rights, will be read to waive those rights, even when such a waiver would be void by statute. With this tortured reasoning,

66

the decision below finds an employer has committed an unlawful act by entering into an agreement that does not contain the offending term, and worse, when by law, it could not contain such a term. The decision thereby turns standard "any and all" release language into a senseless snare for liability, placing at risk not just employers, but any contracting party using this form release. To maintain balance, fairness and rationality in employeremployee and other contractual relationships, Andersen respectfully requests that this Court reverse the Court of Appeal's decision and reinstate the judgment of the trial court. DATED: January 26, 2007

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CERTIFICATE OF WORD COUNT Pursuant to the California Rules of Court, Rule 28.1, subdivision (d)( 1), the text of this petition consists of 13,996 words as counted by the Microsoft Office Word 2003 word-processing program used to generate the petition.

DATED: January 26, 2007

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PROOF OF SERVICE I am employed in the County of Los Angeles, State of California. I am over the age of 18 years and not a party to this action. My business address is Latham & Watkins LLP, 633 West Fifth Street, Suite 4000, Los Angeles, CA 90071-2007. On January 26, 2007, I served the following document(s) described as: OPENING BRIEF ON THE MERITS by serving a true copy of the above-described document in the following manner: I am familiar with the office practice of Latham & Watkins for collecting and processing documents for mailing with the United States Postal Service. Under that practice, documents are deposited with the Latham & Watkins personnel responsible for depositing documents with the United States Postal Service; such documents are delivered to the United States Postal Service on that same day in the ordinary course of business, with postage thereon fully prepaid. I deposited in Latham & Watkins' interoffice mail a sealed envelope or package containing the above-described document and addressed as set forth below in accordance with the office practice of Latham & Watkins for collecting and processing documents for mailing with the United States Postal Service: Richard A. Love, Esq. Beth A. Shenfeld, Esq. Law Offices of Richard A. Love 11601 Wilshire Blvd., Suite 2000 Los Angeles, CA 90025 Attorneys for Plaintiff and Appellant Raymond Edwards II

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

Paul Grossman, Esq. California Employment Law Council Employers Group 515 S. Flower Street, 25 th Floor Los Angeles, CA 90071 Amicus Curiae Attorneys

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

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

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

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

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

I declare that I am employed in the office of a member of the Bar of, or permitted to practice before, this Court at whose direction the service was made and declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed on January 26, 2007, at Los Angeles, California.

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