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  • Release of Claims Does Not Encompass Non-Waivable Claims and Narrow-Restraint Exception to Non-Compete Agreements is Rejected

    The California Supreme Court issued a decision today wherein it held that a general release of claims does not encompass non-waivable statutory protections under Labor Code Section 2802.

    Raymond Edwards II was hired as a tax manager by Arthur Andersen LLP. After some problems with the government, Andersen started selling off its practice groups to various entities. Edwards’ group was scheduled to be purchased by HSBC USA, Inc.

    In order to accept employment with the new company, Edwards was asked to execute a Termination of Non-Compete Agreement (“TONC”). The TONC contained a fairly typical clause releasing Anderson from any liability related to Edwards’ employment. Edwards refused to sign the release. As a result, Andersen terminated Edwards.

    Edwards filed suit claiming the original non-compete agreement violated Business and Professions Code Section 16600. Edwards also claimed that the TONC’s release of “any and all” claims violated Labor Code Sections 2802 and 2804. Labor Code Section 2802 requires an employer to indemnify its employees for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer. Labor Code Section 2804 voids any agreement to waive the protections of Labor Code Section 2802 as against public policy.

    Although the release did not specifically mention Edwards’ rights to indemnification under Labor Code Section 2802, the lower appellate court found that the broad general release unlawfully release claims under Labor Code section 2802. The Supreme Court reverse that portion of the appellate court’s decision because (1) the release did not expressly reference indemnity rights and courts should not read language into a contract that does not exist; and (2) a contract provision “releasing ‘any and all’ claims . . . does not encompass nonwaivable statutory protections, such as thje employee indemnity protection of section [sic] Labor Code 2802.”

    The Supreme Court also held that Andersen’s original non-compete agreement was invalid. The original non-compete agreement prohibited Edwards from “performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination.” The non-compete agreement also prohibited Edwards from providing professional services to any client of Andersen’s Los Angeles office. The Supreme Court found that the non-compete agreement “restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession,” and was therefore invalid.

    In doing so, the Supreme Court refused to adopt a “narrow-restraint exception” to Business and Professions Code Section 16600. Several Ninth Circuit cases adopted a narrow-restraint exception to uphold non-compete agreements that barred one party from courting a specific named customer or a limited number of customers. Today’s Supreme Court decision rejected any such exception, finding the language of Business and Professions Code 16600 unambiguous.

    The Law Office of Phillip J. Griego
    95 South Market Street, Suite 520
    San Jose, CA 95113
    Tel. 408-293-6341
    Original article by Robert E. Nuddleman, former associate of The Law Office of Phillip J. Griego.

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