Labor Employment Law Blog

By Jennifer Redmond and Jonathan Sokolowski

The California Court of Appeal for the Fourth District recently refused to enforce a covenant not to compete against the former employee and selling shareholder of a video game company. In Fillpoint, LLC, v. Maas et al., Case No. G045057, 2012 Cal. App. LEXIS 914 (Cal. Ct. App. Aug. 24, 2012), the Court of Appeal determined that half of a two-part noncompete agreement entered into in the context of the sale of a business was unenforceable, despite the exception for such covenants found in Business and Professions Code Section 16601 (“Section 16601”). This case answers what had previously been an open question under California law: Whether an acquiring company can obtain a non-compete that begins to run upon termination of employment (as opposed to or in addition to a non-compete that begins to run upon closing) from a shareholder who becomes an employee of the buyer. See Hilb, Rogal & Hamilton Ins. Servs. v. Robb, 33 Cal. App. 4th 1812 (1995) (enforcing a noncompete agreement against a selling shareholder that commenced at termination of employment, without any discussion or analysis of whether using termination of employment as the trigger for a noncompete violates Section 16601).

In Edwards v. Arthur Andersen LLP, the California Supreme Court reaffirmed California's strong public policy against covenants not to compete.  The primary issue in the case was whether the Ninth Circuit's "narrow restraint" exception was a proper interpretation of California law.  Under the narrow restraint exception, employers could enforce non-competition agreements that did not "entirely preclude" an employee from practicing his or her trade.  The Supreme Court summarily rejected this exception.  The lesson for employers is that unless a covenant not to compete falls squarely within one of the statutory exceptions, it is not likely to be upheld by a California court.

Every day employers terminate employees and pay significant sums to departing workers in exchange for a release of claims.  Such agreements can give employers a measure of comfort and certainty while at the same time offering departing employees value and simplicity.  However, when a departing employee is 40 years of age or older, and release language is intended to include potential claims under the Age Discrimination in Employment Act of 1967 (the “ADEA”), the agreement must meet all of the requirements of the Older Workers Benefit Protection Act (the “OWBPA”).  Wells v. Xpedx, a United States District Court case from the Middle District of Florida, illustrates the potential pitfalls of failing to do so carefully.