Some Useful Articles for Business Owners
Some unscrupulous attorneys are using Business and Professions Code Section 17200 to extort money from businesses. Recent court decisions make it clear that you can rid yourself of these cases before they become expensive.
Whether you are right or wrong is not always the question. The cost of litigation can put a company out of business. Here are some ways for a business owner to avoid getting sued in the first place.
Contracts mean what they say, and the standard real estate contract is no exception. If it says "attempt to mediate" before filing in court, then do it.
Employment arbitration agreements are all the rage, but do you really want to accept a judgment that may be completely contrary to the law?
In our litigious society, some prospective employees are just waiting for a question that sounds discriminatory. Believe it or not, even a question about the applicant's education can lead to court troubles.
Learn about the Americans With Disabilities Act and how it impacts your company.
There can be valid reasons why a company would want to drug test, but make the decision with your eyes open.
You're thinking about sending a fax announcing your latest business innovation. Will you run afoul of the "junk fax" laws, or is the fax protected free speech?
Good news -- you've been promoted to manager! Surprise, you are now liable in ways you may not have known. In fact, you may be a manager and not even know it.
California follows the "at-will" employment rule, meaning that in most cases an employer can fire an employee without cause, so long as the termination does not breach a contract or violate public policy. Find out how that rule impacts the ability to demote someone.
Did you sign a non-compete? Were you recently "down-sized" and now concerned that your non-compete will prevent you from working in your profession or trade? You might be interested in reading about a recent California Court of Appeal decision holding that non-competes are impermissible in California.
California’s new “hands free” cell phone law took effect on July 1, 2008. Many small business owners are simply unaware that an employer can be held vicariously liable for resulting injuries and property damage if an employee causes an accident while talking on a cell phone for business purposes in violation of the new law.
The law says, "no license, no money" when it comes to Contractors. Nonetheless, unlicensed contractors still work and attorneys still try to find ways to get them paid. Are there any exceptions to he law?
In a ruling long awaited by the employment law sector, the California Supreme Court effectively rejected the use of most non-competition agreements in California.
As you know, Megan's Law set up a website that lists registered sex offenders. Before extending an offer of employment, one might think that checking that website would be a quick way to make sure a sex offender is not being hired, especially if the job involves contact with children. One would be wrong.
Collected here are recent decisions of note that impact our practice areas.
Our Recent anti-SLAPP Victory Illustrates "Stealth" SLAPP action.
One of our latest anti-SLAPP victories provides a beautiful illustration of a "stealth" SLAPP suit that the plaintiff’s attorney failed to recognize, to the great expense of his client.
In this case our (future) client’s business partner, we’ll call him Freddy Fraudster, opened a credit card account at a local bank using our client’s personal information. When our client discovered what Freddy had done, he contacted the bank and informed the personnel there that Freddy had committed fraud, and based on this report the bank closed the account and reported the matter to the police. Our client also filed a police report, and filed for a restraining order against Freddy.
Freddy was not happy. He had a long term relationship with the bank, and based on the report by our client, the bank closed his accounts and would have nothing further to do with him. Apparently thinking the best defense is a good offense, and hoping that winning the race to the courthouse might give him some leverage, Freddy filed an action against our client. He claimed that our client had authorized him to open the account, and that the report to the bank was therefore defamatory since it accused him of fraud.
Do you see why Freddy’s action in Superior Court was a SLAPP suit? We did, and we successfully brought an anti-SLAPP motion. You see, a SLAPP suit is one that tries to block a person’s right of petition. Freddy’s attorney realized that the report to the police and the application for the restraining order were protected rights of petition, but he mistakenly thought that the report to the bank, requesting that the credit card be cancelled, was not a petition for redress and therefore did not fall under the SLAPP statute because it did not involve any government agency. No doubt, he thought that by suing our client for defamation, he could make all his evil deeds go away and get back in good stead with the bank by offering to dismiss the case if our client would withdraw his remarks to the bank, court and police. Now it sounds like a SLAPP, doesn’t it?
The interpretation of the SLAPP statutes by Freddy’s attorney was far too narrow. Consider. One day you run a credit report on yourself and you find that someone has fraudulently opened a credit card in your name. What is the first thing you are going to do? Call an official government agency? You might do that eventually, but first you are going to call the credit card company and tell them to cancel the card. Thus, contacting the credit card company, or in our case the bank, is a natural part of the entire "right of petition."
It’s very similar to the litigation privilege. I occasionally see cases where a defendant tries to sue the plaintiff and his attorney, claiming that the demand letter sent by the attorney was defamatory because it falsely claimed the defendant did something illegal. But under Civil Code section 47, anything said in conjunction with litigation is privileged and therefore not defamatory. The demand letter from the attorney takes place before legal action is ever filed, but it is still part of the litigation process.
So it was here. The report to the bank occurred before any "right of petition" was pursued with a government agency, but calling to cancel the credit card was a natural part of that process. If a plaintiff were permitted to SLAPP a defendant by focusing on the activities leading up to the actual right of petition, then the intent of the anti-SLAPP statutes would be subverted. We explained that to the court, and our motion was granted.
Recent Victories Illustrating anti-SLAPP Motions
The Case of the Outraged City Council Member
In this case, our (future) client addressed a city council meeting on a matter she felt was important to the city. Specifically, the city had been rocked by some controversy involving city council members, and our client was speaking to the issue of how the newly-elected council members should go about performing their duties. To illustrate the point, she cited the example of a former council member who had taken money from special interests. The city council member in question took umbrage with the accusation that she had acted unethically, and sued our client for defamation. We were retained to fight the defamation action.
It is seldom that we are presented with such a clear SLAPP suit. Remember, SLAPP stands for Strategic Lawsuit Against Public Participation. What better example of public participation is there than a citizen addressing their city council? Indeed, under Civil Code section 47, any comments made during a "legislative proceeding" are absolutely privileged (meaning they can never be defamatory). Better yet from the standpoint of an anti-SLAPP motion, section 425.16(e)(1) provides that statements made before a legislative proceeding are protected speech.
So let’s run the facts through the two prongs of the anti-SLAPP analysis. First, as counsel for the defendant, it was our burden to show that the speech was protected within the meaning of the anti-SLAPP statute. That was a no-brainer in this instance, since the words were spoken at a city council meeting. And since the conduct falls under a specific anti-SLAPP section of 425.16, there was no need to show that the topic was a matter of public interest. "Any matter pending before an official proceeding possesses some measure of ‘public significance’ owing solely to the public nature of the proceeding, and free discussion of such matters furthers effective exercise of the petition rights § 425.16 was intended to protect." (Briggs v. Eden Council for Hope & Opportunity (1999) 19 Cal.4th 1106, 1118.)
Our having shown that the speech was protected, the second prong of the anti-SLAPP analysis requires plaintiff to show a reasonable likelihood of success on her claim, which in this case would be impossible. Since section 47 makes speech at a city council meeting absolutely privileged, the speech by definition cannot constitute defamation.
So a slam-dunk anti-SLAPP motion, right? Not quite.
A SLAPP motion puts a stay on all discovery, which is one of the primary benefits of an anti-SLAPP motion because it keeps the plaintiff from using the discovery process as a sledgehammer to try to wear down the defendant. In this case, counsel for Plaintiff had served discovery prior to the anti-SLAPP motion, and argued that the court should permit that discovery prior to ruling on the anti-SLAPP. There is authority for the proposition that a plaintiff should be permitted to conduct discovery to determine whether the defendant acted with malice, because that takes away certain privileges under section 47. However, there is no malice exception for words spoken at a city council meeting, so no amount of discovery by the Plaintiff could have revealed information that would have defeated the anti-SLAPP motion.
Nonetheless, the court granted Plaintiff’s request for discovery, and that added two months to the process. It could have been that the court just did not understand the authorities we provided, but more likely the court was bending over backwards to give the plaintiff access to discovery, specifically because the judge knew she was going to grant the motion, and did not want Plaintiff to have any possible basis for appeal. In that sense, the judge might have done us a favor, but it is frustrating to deal with a frivolous action for an additional two months. We were successful, though, in limiting greatly limiting the discovery. The court denied Plaintiff’s request to take our client’s deposition.
As expected, the discovery revealed nothing useful to the Plaintiff. Instead, the Plaintiff attempted to argue that the conduct by Defendant was "illegal" and therefor not protected. This was another instance where there is authority for the proposition being claimed, but that legal theory had no application to the case at hand. In the case of Flatley v. Mauro, an attorney had sent threatening letters to someone, threatening to sue him if he did not pay a large settlement to a client. Normally, a letter from an attorney in anticipation of litigation would be protected speech under the litigation privilege, but the Flatley court ruled that the attorney’s letters had risen to the level of extortion, and were therefor illegal and unprotected.
Plaintiff was trying to say that our client’s speech at the city council meeting was illegal and therefor unprotected according to Flatley. And how could speech at a city council meeting ever be illegal, you ask? According to Plaintiff, it was illegal because the city council’s own guidelines state that comments should be civil, and Defendant’s comments had not been civil.
Predictably, the court understood that even if the words were interpreted to be rude, a city council’s guidelines do not amount to law, and violating them does not amount to criminal conduct. The court granted our anti-SLAPP motion, striking the defamation complaint and entering judgment in our favor. The court also awarded us over $18,000 in attorney fees against the Plaintiff.
I’ll Sue You if You Sue Me.
The next case was especially satisfying because it was not a classic anti-SLAPP case involving defamation, but we persuaded the judge that the matter fell under the anti-SLAPP laws.
In this case, our (future) client had entered into a settlement agreement with the defendant in a prior action. The settlement agreement required the defendant company to pay damages to our client, and contained a confidentiality agreement. Two years after the settlement agreement was signed, the defendant had still not paid the damages to the plaintiff, so he retained our firm to sue to collect the money due under the agreement.
We filed the action for breach of contract, attaching a copy of the settlement agreement. The defendant answered the complaint and also filed a cross-complaint, claiming that it was a breach of the confidentially agreement to attach the settlement agreement to the complaint. Incidentally, counsel for defendant had discussed with me his intention to cross-complain on this basis, and I had warned him that would be a really bad idea. He did so anyway.
The reason the cross-complaint was a bad idea is because it was a SLAPP. Do you see why? Remember again what SLAPP stands for – Strategic Litigation Against Public Participation. Defendant had breached the settlement agreement, so clearly we were entitled to sue for breach of that contract. That is the public participation – taking a case before a court for redress of a grievance. Defendant was suing our client for suing, claiming that it was a breach of the agreement to make the confidential settlement agreement a matter of public record. We filed our anti-SLAPP motion against Defendant/Cross-Complainant for the cross-complaint.
So let’s run this case through the two-prong, anti-SLAPP analysis. Our burden was to show that the speech was protected under the anti-SLAPP statute. The speech here was the complaint itself, with the settlement agreement attached. Filing a complaint is a specifically protected activity under the anti-SLAPP statute, and comments made in conjunction with litigation are protected under Section 47. There was no issue that our complaint was a protected activity.
That takes us to the second prong, by which the plaintiff, here the cross-complainant, must show a reasonable likelihood of success on the merits of the case, even if the speech is a protected activity. In this regard, the company argued vigorously that the breach by our client was clear – Plaintiff was required to keep the settlement confidential but had breached that obligation by attaching the settlement agreement to the complaint.
This argument showed a fundamental misunderstanding of contract law by counsel for the company. Allow me to resort to a simple analogy to illustrate the point. If I agree to sell you my watch for $100, but you never give me the $100, am I still required to give you my watch? Of course not. In legal jargon, your failure to perform is said to excuse me from my performance. In this simple example, this point of law is clear to anyone, but that is the point that counsel for the company was missing.
Our client was required to keep the agreement confidential in exchange for payment of the damages. But the company never paid the money, so our client was excused from performance. Further, to sue for breach of contract, a plaintiff must allege the terms of the agreement. Here, there was no way to allege a breach of contract without specifying the terms of that agreement. The company argued we should have sought to bring the complaint under seal so no one would ever know the terms, but there is not such obligation required under the law.
But the company had an even more fundamental issue with its cross-complaint. The elements of a breach of contract claim are (1) a contract; (2) a breach of that contract; (3) performance by the plaintiff; and (4) damages from the breach. The company was alleging breach of contract, but it had utterly failed to perform. I attached a declaration from our client saying he had never been paid, and the company could say nothing to refute that point. Thus, the company could never prevail on its breach of contract claim because it could not satisfy the performance element.
The court granted our anti-SLAPP motion, threw
out the cross-complaint, and the company is on
the hook for more than $15,000 in attorney fees.
This was an interesting case involving Michael
Flatley, one of the "Riverdance" dancers. In
this case the California Supreme Court examined
the interplay between the litigation privilege
afforded by Civil Code section 47, and whether
the SLAPP statutes would fail to protect
otherwise privileged speech.
Most attorneys would assume this conduct fell under the litigation privilege of section 47, which protects any communication made in conjunction with or in anticipation of legal action. Flatley's attorney, however, filed a lawsuit against the woman's attorney, alleging extortion, defamation and fraud. The woman's attorney responded by filing an anti-SLAPP motion, seeking to have Flatley's case dismissed. He argued that his letter was a prelitigation settlement offer in furtherance of his constitutional right to petition.
The Court of Appeal and Supreme Court both
disagreed, affirming denial of the attorney's
motion to dismiss. Section 425.16 “cannot be
invoked by a defendant whose assertedly protected
activity is illegal as a matter of law and, for
that reason, not protected by constitutional
guarantees of free speech and petition.” (39
Cal.4th 317.) “[W]here either the defendant
concedes the illegality of its conduct or the
illegality is conclusively shown by the evidence,
the motion must be denied. The rationale is that
the defendant cannot make a threshold showing
that the illegal conduct falls within the purview
of the statute and promotes” its purpose to
prevent and deter lawsuits brought primarily to
chill the valid exercise of free speech and
petition rights. (39 Cal.4th 316.)
Greensprings Baptist Christian Fellowhip Trust v. Cilley
There is currently no federal anti-SLAPP statute, but that does not mean the anti-SLAPP remedy is not available in federal court. In federal diversity cases brought in California, applying California law, a defendant still maintains the right to bring a motion to strike under Civil Procedure section 425.16. But overlaying this statute onto federal procedures has created some issues.
The right to amend.
In California, it is now clear that once an anti-SLAPP motion has been filed, the plaintiff cannot amend the complaint in an attempt to fix the problems that made the complaint a SLAPP. But in the recent case of Greensprings Baptist Christian Fellowhip Trust v. Cilley, the Ninth Circuit saw things differently.
That case arose from a malicious prosecution action. The defendant filed an anti-SLAPP motion which was granted by the court, but with leave to amend. The court ruled that under the very liberal amendment standards of federal court, leave was proper.
As a side note, the decision made little sense, again illustrating that many courts struggle with the hybrid nature of an anti-SLAPP motion. Even though demurrers are not permitted in federal court, that was the standard applied by the District Court. When a demurrer is sustained because the complaint fails to allege essential elements, leave to amend is normally granted to afford the opportunity to allege the missing elements. In Greensprings, the court determined that plaintiff had failed to meet the second prong of the anti-SLAPP analysis – providing sufficient evidence to show a likelihood of success. But why grant leave to amend? If the issue is evidence, then no amount of amending will provide more evidence.
And that takes us to the next difference between state and federal court:
The right to appeal.
California’s anti-SLAPP statute provides for an immediate appeal from a denial, so the defendant did just that. But that raised another issue. Federal courts do not like interim appeals, statute or not. The Court of Appeals held that as a matter of first impression, the order granting anti-SLAPP motion to strike complaint with leave to amend did not conclusively determine disputed question of anti-SLAPP statute's applicability, and thus order was not immediately appealable. "Accordingly, we hold that we lack jurisdiction under the collateral order doctrine to entertain an appeal from the portion of a district court's order granting a defendant's anti-SLAPP motion which gives a plaintiff leave to amend her complaint."
However, the decision was a narrow one limited to the specific circumstances. The Court of Appeal confirmed that California’s right of appeal is available when immediate review is necessary to safeguard the right protected by the state’s statute. Thus, while Greensprings denied the right to appeal, it affirmed that immediate appeal is available under the proper circumstances.
Herein I violate the conventional wisdom that blog posts should be short, because I want a very detailed discussion of non-compete agreements available to both employees and employers. But in case you have time only for a quick takeaway, I first provide a summary and then the long tome.
In a ruling long awaited by the employment law sector, the California Supreme Court effectively rejected the use of most non-competition agreements in California.
In Edwards v. Arthur Andersen, the unanimous court held that Business and Professions Code § 16600 gives California workers great freedom to switch jobs, to compete against old employers and to solicit former clients. “In sum, following the Legislature, this court generally condemns noncompetition agreements,” Justice Ming Chin wrote. “Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule.”
Although the business litigation attorneys at Morris & Stone have long advised that this ruling was coming, this ruling finally creates a brighter line distinction by the state’s highest court. Any non-compete agreements that don’t fall under one of the statutory exemptions are void. Previously there was still a potential loophole by which a non-compete agreement could be found enforceable. The Federal Ninth Circuit had ruled that section 16600 contained a “narrow restraint” exception that allowed companies to use non-compete agreements so long as the pacts only restricted “a small or limited part” of their employees’ future ability to work.
In Edwards, accounting firm Arthur Andersen argued that the Ninth Circuit’s “narrow restraint” exception validated the company’s non-competition agreement, which tax manager Raymond Edwards signed in 1997. In 2002, following upheavals at Arthur Andersen, banking corporation HSBC offered Edwards a job on the condition that he and Arthur Andersen terminate his non-compete contract. Edwards refused to sign the termination agreement because it required him to give up all future legal claims. Arthur Anderson had recently been indicted in connection with the Enron debacle, and Edwards was justifiably concerned that if he was later pulled into the controversy, he might be giving up any indemnity claims against Arthur Anderson if he signed the termination agreement. Arthur Andersen fired Edwards for his refusal to sign the termination agreement, and HSBC rescinded its job offer. Edwards sued both companies for interfering with his career.
“Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception,” Justice Chin wrote. “We reject Andersen’s contention that we should adopt a narrow-restraint exception to §16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under §16600.”
Unfortunately, the Supreme Court, in a footnote, declined to address a trade-secret exception to §16600. The most common dispute when an employee goes to work for a competitor is the issue of clients. The former employer will claim that the client list is a trade-secret, and therefore the employee cannot call on those clients. The employee will claim that there is nothing special about the clients. These competing claims can seriously impact the employability of that employee, because prospective employers do not want to have to worry about who is being solicited by their employees. This decision will place great emphasis on California’s Uniform Trade Secrets Act, a statute that gives employers the right to protect certain company information, including client lists.
In Depth Analysis:
The California Supreme Court granted review to address the validity of noncompetition agreements in California and the permissible scope of employment release agreements. The Court limited review to the following issues: (1) To what extent does Business and Professions Code section 16600 prohibit employee noncompetition agreements; and (2) is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?
The California Supreme Court concluded that section 16600 prohibits employee noncompetition agreements unless the agreement falls within a statutory exception, and that a contract provision whereby an employee releases “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.
In January 1997, Raymond Edwards II (Edwards), a certified public accountant, was hired as a tax manager by the Los Angeles office of the accounting firm Arthur Andersen LLP (Andersen). Andersen’s employment offer was made contingent upon Edwards signing a noncompetition agreement, which prohibited him from working for or soliciting certain Andersen clients for limited periods following his termination. The agreement was required of all managers, and read in relevant part:
“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. [¶] 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. [¶] You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.”
Edwards signed the agreement.
Between 1997 and 2002, Edwards continued to work for Andersen. In March 2002, the United States government indicted Andersen in connection with the investigation into Enron Corporation, and in June 2002, Andersen announced that it would cease its accounting practices in the United States. In May 2002, Andersen internally announced that HSBC USA, Inc. (a New York-based banking corporation), through a new subsidiary, Wealth and Tax Advisory Services (WTAS), would purchase a portion of Andersen’s tax practice, including Edwards’s group.
In July 2002, HSBC offered Edwards employment. Before hiring any of Andersen’s employees, HSBC required them to execute a “Termination of Noncompete Agreement” (TONC) in order to obtain employment with HSBC. Among other things, the TONC required employees to (1) voluntarily resign from Andersen; (2) release Andersen from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from” defendant; (3) continue indefinitely to preserve confidential information and trade secrets except as otherwise required by a court or governmental agency; (4) refrain from disparaging Andersen or its related entities or partners; and (5) cooperate with Andersen in connection with any investigation of, or litigation against, Andersen. In exchange, Andersen would agree to accept Edwards’s resignation, agree to Edwards’s employment by HSBC, and release Edwards from the 1997 noncompetition agreement. HSBC required that Andersen provide it with a completed TONC signed by every employee on the “Restricted Employees” list before the deal went through. At least one draft of the Restricted Employees list contained Edwards’s name. Andersen would not release Edwards, or any other employee, from the noncompetition agreement unless that employee signed the TONC.
Edwards signed the HSBC offer letter, but he did not sign the TONC. In response, Andersen terminated Edwards’s employment and withheld severance benefits. HSBC withdrew its offer of employment to Edwards.
On April 30, 2003, Edwards filed a complaint against Andersen, HSBC and WTAS for intentional interference with prospective economic advantage and anticompetitive business practices under the Cartwright Act (Bus. & Prof. Code, § 16720 et seq.). Edwards alleged that the Andersen noncompetition agreement violated section 16600, which states “[e]xcept 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.” He further alleged that the TONC’s release of “any and all” claims violated Labor Code sections 2802 and 2804, which make an employee’s right to indemnification from his or her employer nonwaivable.
Edwards settled with all parties except Andersen. The trial court dismissed all claims against Andersen, except for those relating to intentional interference with prospective economic advantage, which it concluded presented pure questions of law. The trial court heard argument from both parties, but took no evidence. The court determined all issues of law in favor of Andersen on the merits, and entered judgment in its favor. The trial court specifically decided that (1) the noncompetition agreement did not violate section 16600 because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession; and (2) the TONC did not purport to waive Edwards’s right to indemnification. Thus, requiring him to sign these documents was not unlawful. Edwards appealed the trial court’s decision.
At issue in the Court of Appeal was one of the elements required to prove a claim for intentional interference with prospective economic advantage. In order to prove a claim for intentional interference with prospective economic advantage, a plaintiff has the burden of proving five elements: (1) an economic relationship between plaintiff and a third party, with the probability of future economic benefit to the plaintiff; (2) defendant’s knowledge of the relationship; (3) an intentional act by the defendant, designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the defendant’s wrongful act, including an intentional act by the defendant that is designed to disrupt the relationship between the plaintiff and a third party. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153-1154.) The plaintiff must also prove that the interference was wrongful, independent of its interfering character. (Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392-393.) “[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard. (Korea Supply, supra, 29 Cal.4th at p. 1159.)
At issue in the Edwards case was the third element of the tort. In the Court of Appeal, Edwards argued the independently wrongful acts requirement in this case was met in several ways: (1) the noncompetition agreement was illegal under section 16600, making Andersen’s demand that he give consideration to be released from it against public policy; (2) the TONC’s additional release of “any and all” claims constituted a waiver of his indemnity rights in violation of Labor Code sections 2802 and 2804; and (3) the TONC’s nondisparagement clause violated Labor Code section 1102.5. In the published part of its opinion, the Court of Appeal held: (1) the noncompetition agreement was invalid under section 16600, and requiring Edwards to sign the TONC as consideration to be released from it was an independently wrongful act for purposes of the elements of Edwards’s claim for intentional interference with prospective economic advantage; (2) the TONC purported to waive Edwards’s indemnification rights under the Labor Code and was therefore in violation of public policy and an independently wrongful act; and (3) the TONC’s nondisparagement provision did not violate Labor Code section 1102.5 and so was not an independently wrongful act.
THE HISTORY OF SECTION 16600
Under the common law, as is still true in many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed. (Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288.) This was true even in California. (Wright v. Ryder (1868) 36 Cal. 342, 357 [relaxing original common law rule that all restraints on trade were invalid in recognition of increasing population and competition in trade].) However, in 1872 California settled public policy in favor of open competition, and rejected the common law “rule of reasonableness,” when the Legislature enacted the Civil Code. (Bosley, supra, 161 Cal.App.3d at p. 288.) Today in California, covenants not to compete are void, subject to several exceptions discussed briefly below.
Section 16600 states: “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.” The chapter excepts noncompetition agreements in the sale or dissolution of corporations (§ 16601), partnerships (ibid.; § 16602), and limited liability corporations (§ 16602.5). In the years since its original enactment as Civil Code section 1673, our courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. (D’sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 933.) The law protects Californians and ensures “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859.) It protects “the important legal right of persons to engage in businesses and occupations of their choosing.” (Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1520.)
The Supreme Court has invalidated an otherwise narrowly tailored agreement as an improper restraint under section 16600 because it required a former employee to forfeit his pension rights on commencing work for a competitor. (Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242-243 (Muggill); Chamberlain v. Augustine (1916) 172 Cal. 285, 289 [invalidating contract with partial trade restriction].) In Muggill, the court reviewed an adverse judgment against a company’s retired employee whose pension plan rights were terminated after the former employee commenced work for a competitor. (Muggill, at p. 240.) The retired employee had sued the former employer, seeking declaratory relief on the ground that the provision in the pension plan that terminated the retirement payments because the retiree went to work for a competitor was “against public policy and unenforceable.” (Ibid.) Muggill held that, with exceptions not applicable here, section 16600 invalidates provisions in employment contracts and retirement pension plans that prohibit “an employee from working for a competitor after completion of his employment or imposing a penalty if he does so [citations] unless they are necessary to protect the employer’s trade secrets [citation].” (Muggill, at p. 242.) In sum, following the Legislature, the Supreme Court generally condemns noncompetition agreements. (See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 123, fn. 12 [such restraints on trade are "illegal"].)
Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule. (§ 16600.) Andersen, however, asserted that the California Supreme Court should interpret the term “restrain” under section 16600 to mean simply to “prohibit,” so that only contracts that totally prohibit an employee from engaging in his or her profession, trade, or business are illegal. It would then follow that a mere limitation on an employee’s ability to practice his or her vocation would be permissible under section 16600, as long as it is reasonably based. Andersen contended that some California courts have held that section 16600 (and its predecessor statutes, Civil Code former sections 1673, 1674, and 1675) are the statutory embodiment of prior common law, and embrace the rule of reasonableness in evaluating competitive restraints. (See, e.g., South Bay Radiology Medical Associates v. Asher (1990) 220 Cal.App.3d 1074, 1080 (South Bay Radiology) [§ 16600 embodies common law prohibition against restraints on trade]; Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, 47-48 (Vacco) [§ 16600 is codification of common law reasonable restraint rule].)
Andersen claimed that these cases show that 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 [employer’s personnel] — are not within the scope of [s]ection 16600.” As Edwards observes, however, the cases Andersen cites to support a relaxation of the statutory rule simply recognize that the statutory exceptions to section 16600 reflect the same exceptions to the rule against noncompetition agreements that were implied in the common law. For example, South Bay Radiology acknowledged the general prohibition against restraints on trade while applying the specific partnership dissolution exception of section 16602 to the facts of its case. (South Bay Radiology, supra, 220 Cal.App.3d at p. 1080.) In that case, the covenant not to compete was set forth in a partnership agreement to which appellant doctor was a party. When appellant’s partnership with several other doctors dissolved due to his inability to work following an accident, he challenged the noncompete clause. The court found the partnership exception to section 16600 applicable. (South Bay Radiology, supra, at pp. 1078-1080.) Vacco involved the sale of shares in a business, an exception to section 16600 found in section 16601. The Court of Appeal upheld an agreement not to compete made by a terminated employee who had sold all of his stock in the business for $500,000 prior to his termination. In applying the exception to section 16600, the court held that section 16601 “permits agreements not to compete made by a party selling the goodwill of a business or all of the shares of stock in a corporation.” (Vacco, supra, 5 Cal.App.4th at p. 47.) As the Court of Appeal recognized, “Fairly read, the foregoing authorities suggest section 16600 embodies the original, strict common law antipathy toward restraints of trade, while the section 16601 and 16602 exceptions incorporated the later common law ‘rule of reasonableness’ in instances where those exceptions apply.”
However, the California Supreme Court concluded that Andersen’s noncompetition agreement was invalid. As the Court of Appeal observed, “The first challenged clause prohibited Edwards, for an 18-month period, 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 second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession. (See Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429 [distinguishing "trade route" and solicitation cases that protect trade secrets or confidential proprietary information].) The noncompetition agreement that Edwards was required to sign before commencing employment with Andersen was therefore invalid because it restrained his ability to practice his profession. (See Muggill, supra, 62 Cal.2d at pp. 242-243.)
The Ninth Circuit’s Narrow-Restraint Exception
Andersen argued to the Supreme Court that it should adopt the limited or “narrow-restraint” exception to section 16600 that the Ninth Circuit discussed in Campbell v. Trustees of Leland Stanford Jr. Univ. (9th Cir. 1987) 817 F.2d 499 (Campbell), and that the trial court relied on in this case in order to uphold the noncompetition agreement. In Campbell, the Ninth Circuit acknowledged that California has rejected the common law “rule of reasonableness” with respect to restraints upon the ability to pursue a profession, but concluded that section 16600 “only makes illegal those restraints which preclude one from engaging in a lawful profession, trade, or business.” (Campbell, supra, 817 F.2d at p. 502.) The court remanded the case to the district court in order to allow the employee to prove that the noncompetition agreement at issue completely restrained him from practicing his “profession, trade, or business within the meaning of section 16600.” (Campbell, at p. 503.)
The confusion over the Ninth Circuit’s application of section 16600 arose in a paragraph in Campbell, in which the Ninth Circuit court noted that some California courts have excepted application of section 16600 ” ‘where one is barred from pursuing only a small or limited part of the business, trade or profession.’” (Campbell, supra, 817 F.2d at p. 502.) The Ninth Circuit cited two California cases that it believed may have carved out such an exception to section 16600. (See Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 (Boughton) [interpreting deed restriction on land use] and King v. Gerold (1952) 109 Cal.App.2d 316 (King) [rejecting manufacturer’s argument that clause not to produce its product after license expiration was not an illegal restraint under section 16600].) Andersen relied on those cases, citing them as the underpinnings of the Ninth Circuit’s exception to section 16600, and urging the court to adopt their reasoning. As the Court of Appeal observed, however, the analyses in Boughton and King do not provide persuasive support for adopting the narrow-restraint exception. In Boughton, the restriction was not upon the plaintiff’s practice of a profession or trade, but took the form of a covenant in a deed to a parcel of land that specified the land could not be used as a gasoline service station for a specified time period. (Boughton, supra, 231 Cal.App.2d 188.) Because the case involved the use of the land, section 16600 was not implicated. Of note is the fact that Boughton relied on King, an unfair competition case in which the court applied a trade secret exception to the statutory rule against noncompetition clauses. (King, supra, 109 Cal.App.2d 316.) In King, the plaintiff was not simply engaged in the manufacture and sale of goods (house trailers) but was allegedly using a trailer design substantially similar to his former employer’s, the inventor of the design. (Id. at p. 318.)
Andersen was correct, however, that Campbell had been followed in some recent Ninth Circuit cases to create a narrow-restraint exception to section 16600 in federal court. For example, International Business Machines Corp. v. Bajorek (9th Cir. 1999) 191 F.3d 1033, upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. General Commercial Packaging v. TPS Package (9th Cir. 1997) 126 F.3d 1131, held that a bargained-for contractual provision barring one party from courting a specific named customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude” the party from pursuing its trade or business. (General Commercial Packaging v. TPS Package, supra, 126 F.3d at p. 1133.)
Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and the California Supreme Court was of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” (Scott v. Snelling and Snelling, Inc. (N.D.Cal. 1990) 732 F. Supp. 1034, 1042.) Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. The California Supreme Court rejected Andersen’s contention that California Supreme Court should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.
Contract Provision Releasing “Any and All” Claims
Edwards was not terminated from Andersen for refusing to sign the noncompetition agreement. Rather, Andersen made it a condition of Edwards’s obtaining employment with HSBC that Edwards execute the TONC, releasing Andersen from, among other things, “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to [Edwards’s] employment by, association with or compensation from” Andersen. As the Courtof Appeal held, to the extent Andersen demanded Edwards execute the TONC as consideration for release of the invalid provisions of the noncompetition agreement, it could be considered a wrongful act for purposes of his claim for interference with prospective economic advantage. An employer “cannot lawfully make the signing of an employment agreement, which contains an unenforceable covenant not to compete, a condition of continued employment . . . . [A]n employer’s termination of an employee who refuses to sign such an agreement constitutes a wrongful termination in violation of public policy.” (D’Sa v. Playhut, Inc., supra, 85 Cal.App.4th at p. 929.)
More importantly in the Edwards case, however, are the provisions of the TONC that purport to release Andersen from liability for claims arising out of Edwards’s employment with that company. These are the provisions that Edwards contested in the appellate court. As is a fairly typical practice, at the time of his separation from Andersen, Edwards was asked to execute a broad general release in Andersen’s favor. Section (1)(d) of the TONC provided that Edwards must release and discharge Andersen from “any and all actions, causes of action, claims, demands, debts, damages, costs, losses, penalties, attorneys’ fees, obligations, judgments, expenses, compensation or liabilities of any nature whatsoever, in law or equity, whether known or unknown, contingent or otherwise, that Employee now has, may have ever had in the past or may have in the future against any of the Released Parties by reason of any act, omission, transaction, occurrence, conduct, circumstance, condition, harm, matter, cause, or thing that has occurred from the beginning of time up to and including the date hereof, including, without limitation, claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from [Andersen] or any of its affiliated firms, except for claims (I) arising out of [Andersen’s] obligations set forth in this agreement or (ii) for any accrued and unpaid salary or other employee benefit or compensation owing to employee as of the date hereof.” The trial court concluded that on the issue of waiver of indemnity, the TONC was a typical broad release that did not request indemnity rights be waived. The court added that “the Labor Code pretty much tells us that right can’t be waived. As a matter of law, any provision in the release that attempts to waive it would be void.” The court concluded that it did not have to reach the question because the release did not require Edwards to “give up his rights as a matter of law.”
The Court of Appeal disagreed. It concluded that the TONC’s plain language did indeed implicitly waive Edwards’s Labor Code section 2802, subdivision (a), indemnity rights, and that Andersen could not make Edwards’s future employment contingent on his waiving the statutorily mandated rights. As California Supreme Court explain, California Supreme Court disagree with the Court of Appeal on this point. Labor Code section 2802, subdivision (a), provides for an employee’s right to indemnity. That subdivision reads: “An employer shall indemnify his or her employee 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, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.” Labor Code section 2804 voids any agreement to waive the protections of Labor Code section 2802 as against public policy. Labor Code section 2804 provides, “Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void, and this article shall not deprive any employee or his personal representative of any right or remedy to which he is entitled under the laws of this State.” (Italics added.) Courts have interpreted Labor Code section 2804 to apply to Labor Code section 2802, making all contracts that waive an employee’s right to indemnification null and void. (See Liberio v. Vidal (1966) 240 Cal.App.2d 273, 276, fn. 1.) Thus, indemnity rights are nonwaivable, and any contract that does purport to waive an employee’s indemnity right would be contrary to the law and therefore unlawful to that extent.
“California has a strong public policy that favors the indemnification (and defense) of employees by their employers for claims and liabilities resulting from the employees’ acts within the course and scope of their employment.” (Chin et al., Cal. Practice Guide: Employment Litigation (The Rutter Group 2007) ¶ 3:1, p. 3-1.) Labor Code section 2802 codifies this policy and gives an employee a right to indemnification from his or her employer. (See Grissom v. Vons Companies, Inc. (1991) 1 Cal.App.4th 52, 59-60 [the purpose of Lab. Code, § 2802 is "to protect employees from suffering expenses in direct consequence of doing their jobs"]; Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th 55, 74, fn. 24 [Lab. Code, § 2802 "shows a legislative intent that duty-related losses ultimately fall on the business enterprise, not on the individual employee"].) Edwards asserts that the TONC’s language releasing “any and all” claims encompassed his statutorily nonwaivable right to indemnification under Labor Code section 2802, thus amounting to an independent wrongful act that would support his intentional interference with prospective advantage claim. The Court of Appeal agreed with Edwards, concluding that although the TONC did not reference the right to indemnity, it did not have to because those rights were “necessarily encompassed within the clear terms of the broad release.”
The Court of Appeal found it especially telling that Labor Code section 2802 requires indemnification for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties,” and that the TONC waives claims for losses, costs, and expenditures “of any nature whatsoever.” Although the Court of Appeal noted that the TONC did not expressly waive Edwards’s indemnity rights, the court cited Bardin v. Lockheed Aeronautical Systems Co. (1999) 70 Cal.App.4th 494, 505 (Bardin), for the rule that “[a] broadly worded release covers all claims within the scope of the language, even if the particular claim is not expressly listed.” In Bardin, the appellant, Bethany Bardin, applied for a job with the Los Angeles Police Department (LAPD). The LAPD performed an investigation into Bardin’s background, in the course of which it obtained information from her former employer, Lockheed Martin Corporation (Lockheed). (Id. at pp. 497-498) When applying to the LAPD, Bardin signed a “Release and Waiver” form that “released any former employer from ‘any or all liability for damage of whatever kind, which may at any time result to [appellant], . . . because of compliance with this authorization and request to release information . . . .’ ” (Id. at p. 498.) When the LAPD did not offer her a job, Bardin sued Lockheed, claiming it provided the LAPD with misleading negative information that caused the LAPD to reject her employment application. (Id. at pp. 498-499.) Bardin claimed that the release did not “expressly release respondents from disseminating false or baseless statements,” but the court disagreed, finding that the release “broadly and unambiguously releases a former employer ‘from any and all liability for damage of whatever kind . . . .’ ” (Id. at p. 505.)
The language “any and all” is common to both the release in Bardin and the release in the present case (and is common to most release agreements). In addition, the remaining language in both releases is generally similar. But the rights being released in each are entirely different. Unlike the rights at issue in Bardin, the indemnity rights in the present case are nonwaivable under Labor Code section 2802, and any waiver that attempts to waive those rights is unlawful. Therefore, the fact that the California Supreme Court ad to interpret those rights as within the scope of the phrase “any and all,” made Bardin inapposite in the Edwards case. In contrast to Bardin, the Edwards TONC expressly excepted two types of claims from release. The first were claims arising from the TONC itself. The second was for “any accrued and unpaid salary or other employee benefit or compensation owing to Employee as the date hereof.” The Court of Appeal believed that indemnity rights did not fall within either of these exceptions, and even if the right to indemnification did qualify as compensation, the release remained invalid because its exception applied only to compensation owed as of the date of the agreement, a clause that would have improperly waived Edwards’s right to future indemnity claims under Labor Code section 2802. The Supreme Court also noted that because the release expressly excepted two types of claims, but did not expressly exempt indemnification rights, the release intended to waive those rights. As the California Supreme Court explained, under Labor Code section 2802, a contract provision releasing “any and all” claims generally does not encompass nonwaivable statutory protections, and in particular does not implicitly apply to an employee’s right to indemnification from the employer.
“Where the language of a contract is clear and not absurd, it will be followed. [Citations.] But if the meaning is uncertain, the general rules of interpretation are to be applied.” (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 741; Civ. Code, §§ 1637, 1638; see also Sierra Vista Regional Medical Center v. Bontá (2003) 107 Cal.App.4th 237, 245-246.) In Edwards, the meaning was in dispute and uncertain; the California Supreme Court had to therefore decide what the phrase “any and all” means. “If a contract is capable of two constructions courts are bound to give such an interpretation as will make it lawful, operative, definite, reasonable and capable of being carried into effect . . . .” (Rodriguez v. Barnett (1959) 52 Cal.2d 154, 160; see also Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401, 411; Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, 278; Civ. Code, §§ 3541 ["[a]n interpretation which gives effect is preferred to one which makes void”], 1643 ["[a] contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect”].)
The Edwards TONC did not expressly reference indemnity rights, and California Supreme Court should not read it as encompassing a waiver of Edwards’s indemnity rights. Giving the TONC such a reading is consistent with the tenets of contractual interpretation because it makes the contract lawful, valid and capable of being carried into effect. In addition, our conclusion makes it unnecessary to insert additional language or terms into the contract, which is consistent with Code of Civil Procedure section 1858 and its mandate that when courts construe an instrument, a judge is “not to insert what has been omitted, or to omit what has been inserted . . . .” “[I]t is one of the cardinal rules of interpreting an instrument to give it such construction as will make it effective rather than void.” (Toland v. Toland (1898) 123 Cal. 140, 143.) The California Supreme Court applied this rule in holding that a contract provision releasing “any and all” claims, such as that used in the TONC in the present case, does not encompass nonwaivable statutory protections, such as the employee indemnity protection of section Labor Code 2802. In so holding, the California Supreme Court interpret the TONC such that it does not violate Labor Code section 2804. As a consequence, the TONC was neither unlawful nor null and void.
Even if the California Supreme Court ignored the above principles of contract interpretation, it could still find that releasing “any and all” claims does not implicate Edwards’s nonwaivable right to indemnity. Andersen contended it did not except indemnity rights from the release because it was aware that under Labor Code section 2804, such rights are statutorily nonwaivable. Andersen asserted essentially that such an exception was legally unnecessary. California case law arguably supported Andersen’s contention. “‘”[A]ll 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.” [Citation.]’” (Torrance v. Workers’ Comp. Appeals Bd. (1982) 32 Cal.3d 371, 378, quoting Alpha Beta Food Markets v. Retail Clerks Union (1955) 45 Cal.2d 764, 771.) This means that when the California Supreme Court interpreted the TONC, it could presume that Andersen knew Edwards’s indemnity rights were statutorily nonwaivable. It also means California Supreme Court may treat the TONC as if it expressly includes the substance of Labor Code section 2804: that no employee’s right to indemnification, to which he or she is entitled under the law, can be waived. (Liberio v. Vidal, supra, 240 Cal.App.2d at p. 276 & fn. 1.) Therefore, the waiver of “any and all” claims would not encompass the right to indemnification, because California Supreme Court treat the TONC as expressly incorporating the law that the employee cannot waive that right. Edwards argued that contract drafters could easily fix the overbroad release problem by including the clause “except as otherwise prohibited by law” after “any and all.” But that distinction was no important. The phrase “except as otherwise prohibited by law” is vague and essentially informs the employee of nothing. In addition, it appears most practitioners already operate with the understanding that the release does not encompass items “otherwise prohibited by law.” If they do, they are null and void under the Labor Code.
Therefore, the California Supreme Court believed that voiding all existing releases which include the language “any and all” is inappropriate. The California Supreme Court concluded that a contract provision releasing “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802 and, accordingly, is not void under Labor Code section 2804.
The California Supreme Court held that the noncompetition agreement was invalid under section 16600, and the Court rejected the narrow-restraint exception urged by Andersen. Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they fall within the applicable statutory exceptions of sections 16601, 16602, or 16602.5. In addition, the California Supreme Court concluded that the TONC at issue in the case did not purport to release Andersen from any nonwaivable statutory claims and therefore is not unlawful under Labor Code sections 2802 and 2804.