Earlier this week, California’s Supreme Court reaffirmed the state’s position on noncompete clauses: they’re almost never valid, except for in a few specific circumstances. While this has been the state’s policy since 1872, the law recently came into question in the case of Edwards II v. Arthur Andersen LLP, in which the accounting firm tried to uphold a noncompete contract Edwards signed in 1997.
The point in question was a “narrow restraint exception”, which effectively punished employees for joining a competitor, but didn’t prohibit them for doing so. If the ruling had gone the other way, companies would be allowed to restrict employees’ pensions and stock value in retaliation for their departure. The Court’s ruling has stricken this exception, affirming that any such punishment is illegal.
However, this ruling has no bearing on confidentiality agreements – companies are still allowed to defend their intellectual property and trade secrets. But this is much harder to enforce, as evidence is usually always indirect and there’s rarely a smoking gun. The ruling also has no impact on another one of the law’s exceptions, which allows for non-compete agreements during the sale of shares in a company. For example, Google could lawfully require the owner of a company it acquired to sign a noncompete agreement as a means to protect its investment.
For Californians, nothing will change. But what about other states with growing tech communities, like Massachusetts and Washington, where noncompete agreements are allowed? Many people have blamed the relatively small growth of the tech sector in these states on their noncompete clauses, because they prevent the “best and brightest” from forming or joining their own companies at will, and some blogs have suggested that this ruling might change things.
Daniel McCoy, an attorney at Fenwick and West who specializes in employment litigation, says that the ruling is too subtle to have any impact on the law’s standing in other states. Because there has been no real change, no precedent has been set that didn’t already exist, and there’s little for activists to rally around.
Silicon Valley is the world’s technology hotbed, bringing both talent and revenues to California. If the potential economic gains to be seen in states like Massachusetts and Washington aren’t enough of an incentive to drive them to change their policy, we can’t expect this ruling to change anything.