Case No. S147190

IN THE SUPREME COURTOF THE STATE OF CALIFORNIA

RAYMOND EDWARDS II,Plaintiff and Appellant,

v.

ARTHUR ANDERSEN LLP,Defendant and Respondent.

APPLICATION FOR LEAVE TO FILE AMICI CURIAE BRIEFAND PROPOSED AMICI CURIAE BRIEF IN SUPPORT OF

DEFENDANT, RESPONDENT, AND PETITIONER ARTHURANDERSEN LLP

After a Decision by the Court of Appeal,Second Appellate District, Division Three

Case No. BI78246

Los Angeles Superior Court Case No. BC 255796Honorable Andria K. Richey, Judge

PAUL, HASTINGS, JANOFSKY & WALKER LLPPaul Grossman (State Bar No. 35959)

Jennifer S. Baldocchi (State Bar No. 168945)515 South Flower Street, 25th Floor

Los Angeles, California 90071

Attorneys for Amici CuriaeCALIFORNIA EMPLOYMENT LAW COUNCIL

and ACTIVISION, INC.

APPLICATION FOR LEAVE TO FILEAMICI CURIAE BRIEF

Pursuant to Rule 8.520 of the California Rules of Court, Activision,

Inc. ("Activision") and the California Employment Law Council ("CELC")

respectfully request permission to appear as amici curiae in this proceeding

and to file the attached proposed brief in support of Petitioner Arthur

Andersen LLP ("Andersen").

IDENTIFICATION OF AMICI

The CELC is a voluntary, nonprofit organization that promotes the

common interests of employers and the general public in fostering the

development in California ofreasonable, equitable, and progressive rules of

employment law. CELC's membership includes approximately 50 private­

sector employers in the State of California, who collectively employ well in

excess of a half-million Californians and include representatives from many

different sectors of the nation's economy (aerospace, automotive, banking,

technology, construction, energy, manufacturing, telecommunications, and

others). Activision is a leading international publisher of interactive

entertainment software products. Activision is headquartered in California.

CELC has been granted leave to participate as amicus curiae in

many of California's leading employment cases, such as: Foley v.

Interactive Data Corp., 47 Cal. 3d 654 (1988); Cassista v. Community

Foods, Inc., 5 Cal. 4th 1050 (1993); Turner v. Anheuser-Busch, Inc., 7 Cal.

4th 1238 (1994); Cotran v. Rollins Hudig HallInt '1, Inc., 17 CaL 4th 93

(1998); White v. Ultramar, Inc., 21 Cal. 4th 563 (1999); Armendariz v.

Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000); Cortez v.

Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000); Richards v.

1

CH2M Hill, Inc., 26 Cal. 4th 798 (2001); and Asmus v. Pacific Bell, 23 Cal.

4th 1 (2000).

CELC and Activision have a significant interest in the outcome of

this case. The Court of Appeal's bright-line rule prohibiting restrictive

covenants is unreasonable, inconsistent with settled precedent, and will

negatively impact employer investment in employee development, client

relationships and the protection of confidential, proprietary information.

The decision threatens to invalidate countless contracts in which the parties

relied upon the narrow restraint doctrine, which is based on long-standing

Ninth Circuit and California case law. CELC members and Activision are

interested in a carefully enunciated framework to evaluate noncompetes on

a case-by-case basis that is consistent with California Business and

Professions Code Section 16600. A per se rule goes too far and threatens

to sacrifice enforceable contracts in favor of an improper rule of absolute

certainty.

CELC and Activision likewise are interested in the Court of

Appeal's approach to employee releases. When terminations of employees

occur, public policy favors an amicable resolution of any employee

claims - severance pay in exchange for a release. CELC members

routinely reimburse business expenses, separate and apart from the

severance pay/release agreement. But, as set forth in more detail below, it

is virtually impossible to list as an exception to a general release every

claim that as a matter oflaw cannot be released. Under federal and state

laws, there are innumerable claims that cannot be released. Therefore,

California employers have regularly entered into severance pay/release

agreements that contain general releases that do not either state the obvious

2

("This release does not apply to that which cannot be released.") or attempt

to provide a laundry list of claims not covered because as a matter of law

they cannot be released. CELC members and Activision therefore have the

strongest possible interest in avoiding contentions based on the Court of

Appeal decision that all of their severance pay/release agreements entered

into in recent years are against public policy and void.

CONCLUSION

For the foregoing reasons, CELC and Activision respectfully request

that the Court grant them leave to participate in this proceeding as amici

curiae and accept their proposed brief.

Dated: May /1, 2007 Respectfully submitted,

PAUL, HASTINGS, JANOFSKY & WALKERLLP

By:---!e-~~~~~~~=--Paul Grossman

Attorneys for Amici Curiae CALIFORNIAEMPLOYMENT LAW COUNCIL andACTIVISION, INC.

3

TABLE OF CONTENTS

Page

I. INTRODUCTION AND SUMMARY OF AMICI BRIEF 1

II. CALIFORNlA BUSINESS AND PROFESSIONS CODESECTION 16600 BARS ONLY THOSE CONTRACTSTHAT RESTRAIN ONE FROM ENGAGING IN APROFESSION, TRADE, OR BUSINESS 4

A. Reasonably Limited Restrictions Which Tend More ToPromote Than Restrain Trade Do Not Violate TheStatute 4

1. The statute does not provide a bright-line ruleagainst covenants not to compete 4

2. The case law permits narrow restraints asoutside the scope of Section 16600 5

B. The Analysis Of A Restrictive Covenant Should BeginWith A Determination OfWhether Trade Secrets OrThe Statutory Exceptions Are Involved, But ShouldNot End There. Rather, The Issue Is Whether There IsA Limitation On Specific Conduct Rather Than ATrue Restraint Of Competition 8

C. Section 16600 Does Not Necessarily Invalidate AnAgreement Delimiting How An Employee CanCompete: Several Concrete Factors May Be Used ToAnalyze Restrictive Covenants 11

D. Public Policy Supports Narrow Restraints 13

E. If This Court Rejects The Narrow Restraint Doctrine,That Rule Should Be Prospective Only 17

III. RELEASES ARE NOT VOID SIMPLY BECAUSE THEYDO NOT STATE THE OBVIOUS ("THIS RELEASE DOESNOT APPLY TO CLAIMS THAT CAc~OT BEWAIVED.") OR THE IMPOSSIBLE (LIST EVERYCONCEIVABLE CLAIM THAT CANNOT BERELEASED) 18

A. Stating The Obvious Is Meaningless: Any Attempt ToApply A General Release To Claims Which Cannot AsA Matter Of Law Be Released Would Be Void As ToThose Claims, But Otherwise Valid 18

1

TABLE OF CONTENTS(continued)

Page

B. It Is Impossible To List All Claims Which Cannot BeWaived 19

C. Requiring An Employer To List Every Claim ThatCannot Be Included In A General Release Is ContraryTo The General Principle That Releases Should BeEasily Understood 21

D. Competent Employee And Management AttorneysAnd Sophisticated Legal Treatises Have Long AdvisedClients To Utilize Severance PaylRelease AgreementsContaining General Releases 22

E. IfFor Any Reason This Court Were To Agree WithThe Court Of Appeal That It Is Against Public PolicyTo Offer A SeverancelRelease Agreement That DoesNot Expressly State That It Does Not CoverUnwaivable Claims, That Rule Should Be ProspectiveOnly 23

N. CONCLUSION 23

11

TABLE OF AUTHORITIES

Page

CASES

Aetna Bldg. Maintenance Co. v. West,39 Cal. 2d 198 (1952) 9

Barrentine v. Arkansas-Best Freight Sys., Inc.,450 U.S. 728 (1981) 20

Boughton v. Socony Mobil Oil Co.,231 Cal. App. 2d 188 (1964) 6, 7

Campbell v. Board ojTrustees ojLeland StanJord Junior Univ.,817 F.2d 499 (9th Cir. 1987) 7

Dierlam v. Wesley Jessen Corp.,222 F. Supp. 2d 1052 (N.D. Ill. 2002) 21

Edwards v. Arthur Andersen LLP,142 Cal. App. 4th 603 (2006) 1, 3, 8,11,13,16

General Commercial Packaging, Inc. v. TPS Package Engineering, Inc.,126 F.3d 1131 (9th Cir. 1997) 7,8

Golden State Linen Serv., Inc. v. Vidalin,69 Cal. App. 3d 1 (1977) 11

Gordon v. Landau,49 Cal. 2d 690 (1958) 5, 6, 11

In re: Marriage ojBrown,15 Cal. 3d 838 (1976) 18

International Business Machines Corp. v. Bajorek,191 F.3d 1033 (9th Cir. 1999) 8

John F. Matull & Associates, Inc. v. Cloutier,194 Cal. App. 3d 1049 (1987) 11

Jones v. Humanscale Corp.,130 Cal. App. 4th 401 (2005) 11

King v. Gerold,109 Cal. App. 2d 316 (1952) 6, 7,15

111

TABLE OF AUTHORITIES

Page

Latona v. Aetna u.s. Healthcare Inc.,82 F. Supp. 2d 1089 (C.D. Cal. 1999) 8

Loral Corp. v. Moyes,174 Cal. App. 3d268 (1985) 8,9, 10, 11, 12

National Starch and Chemical Corp. v. Parker Corp.,219 N.J. Super. 158 (1987) 15

Richardson v. Sugg,448 F.3d 1046 (8th Cir. 2006) 21

Werlinger v. Mutual Servo Cas. Ins. Co.,496 N.W.2d 26 (N.D. 1993) 17

Whyte V. Schlage Lock Co.,101 Cal. App. 4th 1443 (2002) 11, 16

Woods V. Young,53 Cal. 3d 315 (1991) 17

STATUTES

29U.S.C. §216(c) 20

29 U.S.C. § 626(f) 21

29 U.S.c. § 626(f)(I)(A) 21

Cal. Bus. & Prof. Code § 16600 2,1,2,4,5,6,11,13, 17,23

Cal. Bus. & Prof. Code § 16601-16602.5 2

Cal. Civ. Code § 1643 12

Cal. Civ. Code § 3541 12

CAL. LAB. CODE § 206.5 20

Cal. Lab. Code § 2802 3,20

Cal. Lab. Code § 5001 20

Cal. Unemp. Ins. Code § 1342 20

IV

TABLE OF AUTHORITIES

Page

N.D. Cent. Code § 9-08-06 17

OTHER AUTHORITIES

Eric A. Posner & George G. Triantis,Covenants not to Compete from an Incomplete Contracts Perspective,at 1 (John M. Olin Program in Law & Economics Working Paper Series,No. 137, 2d Series, 2001) 14

Norman D. Bishara,Covenants not to Compete in a Knowledge Economy: BalancingInnovation from Employee Mobility Against Legal Protectionfor Human Capital Investment,27 Berkeley J. Emp. & Lab. L. 287, 296 (2006) 14, 17

Ronald J. Gilson,The Legal Infrastructure of High Technology Industrial Districts: SiliconValley, Route 128, and Covenants not to Compete,74 N.Y.U.L. Rev. 575 (1999) 17

REGULATIONS

29 C.F.R. § 825.220(d) 20,21

v

I. INTRODUCTION AND SUMMARY OF AMICI BRIEF

In the decision below, the Court ofAppeal mistakenly created a

bright-line rule against restrictive covenants. In Edwards, the court held

that a contract barring a former employee from performing services for

certain clients, while leaving him free to pursue his profession and serve

any other clients is per se invalid under California Business and Professions

Code Section 16600, unless: (1) it is necessary to protect trade secrets; or

(2) it falls within the statutory sale-of-a-business or partnership-dissolution

exceptions.! The Court of Appeal rejected the "narrow restraint" doctrine,

most recently articulated by the Ninth Circuit (interpreting California law),

as a misapplication of California law. This result is incorrect for three

reasons. First, the plain language of Section 16600 does not invalidate all

agreements that limit the manner in which a former employee may perform

services for a competitor. Rather, the relevant test is whether the former

employee is able to engage in his or her profession, trade, or business,

notwithstanding the limitation. Second, the Court ofAppeal contradicted

significant case law allowing narrow restrictions. Third, the court

improperly based its analysis on the propriety of so-called judicial

"exceptions" to Section 16600. The proper approach focuses only on

whether a contract falls within the ambit of Section 16600.

Section 16600 does not bar all employee covenants not to compete.

It does not even mention noncompetes. The statute provides:

Except as provided in this chapter, everycontract by which anyone is restrained from

1 All subsequent statutory references are to the California Business andProfessions Code unless otherwise noted.

1

engaging in a lawful profession, trade, orbusiness of any kind is to that extent void.

CAL. Bus. & PROF. CODE § 16600. The only question that a court should

consider when evaluating a noncompete that falls outside of the exceptions

specified in Sections 16601 to 16602.5 is whether the contract restrains a

person's ability to engage in a lawful profession, trade, or business. If the

contractual language is narrowly tailored to the surrounding circumstances

and leaves a substantial portion of the market available, it falls outside the

scope of Section 16600. Alternatively, to the extent a contract actually

restrains a person from engaging in his or her profession, trade, or business,

it is void.

The Court of Appeal also reached an incorrect result with respect to

employee releases. Every year in California, on thousands of occasions,

employers large and small, sophisticated and unsophisticated, peacefully

resolve potential termination disputes with employees by providing

severance pay in exchange for a general release. Normally, separate and

apart from the severance agreement, these employers fully comply with

their obligation to indenmify employees for expenses incurred in the course

of their employment - indenmification is not at issue. However, the

overwhelming majority of such severance pay agreements do not state the

obvious - that the contractual release does not extend to matters that as a

matter oflaw cannot be waived, such as indemnity rights.

The Court of Appeal decision raises the specter that trial courts

throughout California will be asked to declare void virtually every

severance pay and release agreement entered into between California

2

employers and employees over the last four years. The Edwards court

held:

Because employee indemnity rights underLabor Code Section 2802 implement publicpolicy and inure to the public benefit, forcing anemployee to waive his or her statutory rightsviolates public policy.

Edwards v. Arthur Andersen LLP, 142 Cal. App. 4th 603,630 (2006). The

release in Edwards did not specifically include indemnity rights within its

scope, and in fact exempted "any accrued and unpaid salary or other

employee benefit or compensation," but the Edwards court nevertheless

held:

The [general release] did not expresslyreference indemnity rights, but it did not haveto: They were necessarily encompassed withinthe clear terms of the broad release. A broadlyworded release covers all claims within thescope of the language, even if the particularclaim is not expressly listed.

142 Cal. App. 4th at 629. Finally, Edwards stated:

While Andersen is correct that a release ofEdwards' indemnity rights would have beenvoid, courts have rejected the view thatrequiring an employee to sign an ineffectiveagreement is not wrongful simply because theprovision would not be enforced.

142 Cal. App. 4th at 631.

It cannot be the law that a general release which neither specifically

includes nor excludes a particular right that is not waivable is against public

policy. Plaintiffs' counsel throughout the State of California will contend

3

that if a release is against public policy the release is totally void.

Employers throughout the State of California are unclear as to how to deal

with the situation. Is it sufficient if the release states what should be

obvious ("This release does not extend to matters that cannot as a matter of

law be released.")? Or must employers attempt the impossible­

specifically provide in every release that it does not apply to the myriad

claims that cannot lawfully be released under federal or state law? It is

difficult to imagine a Court of Appeal decision that calls out more strongly

for reversal.

II. CALIFORNIA BUSINESS AND PROFESSIONS CODESECTION 16600 BARS ONLY THOSE CONTRACTS THATRESTRAIN ONE FROM ENGAGING IN A PROFESSION,TRADE, OR BUSINESS.

A. Reasonably Limited Restrictions Which Tend More ToPromote Than Restrain Trade Do Not Violate TheStatute.

1. The statute does not provide a bright-line ruleagainst covenants not to compete.

Section 16600 does not invalidate every covenant not to compete

and every nonsolicitation agreement. It does not invalidate all contracts

that bar a former employee from performing services for certain clients

during a limited period of time. Section 16600 does not create a bright-line

rule, and this Court should not adopt one.

Because not all restrictive covenants are alike, they must be analyzed

in the context of the parties, the public, and the relevant facts.

Section 16600 implicates a wide variety of agreements, including outright

bans on competition; client nonsolicitation agreements; employee

4

nonsolicitation agreements; restrictions on the use of confidential or

proprietary information (even if such information does not qualify as a

trade secret); and severance agreements where a former employee is free to

compete, but is paid a sum at the end of every month that he chooses not to

do so. Not all of these agreements are per se invalid many have been

approved by California courts and federal courts applying California law.

2. The case law permits narrow restraints as outsidethe scope of Section 16600.

In evaluating contracts placing limitations on post-employment

activities in competition with a prior employer, the case law goes beyond a

perfunctory, mechanical inquiry into the existence of trade secrets and

statutory exceptions. Instead, the law focuses on whether a given contract

in fact prevents a person from carrying on his or her business. In Gordon v.

Landau, 49 Cal. 2d 690 (1958), for example, the Court enforced a broad

customer nonsolicitation agreement, which provided in relevant part:

Collector-Salesman further agrees that duringthe period of one (I) year immediately after thetermination ofhis employment ... he will not, .. . directly or indirectly, ... either for himself orfor any other person, firm, company orcorporation, call upon, solicit, divert, or takeaway ... any of the customers, business orpatrons of the Employer upon whom he called.

ld. at 692-93. While the Gordon court noted that the employer's customer

list was a trade secret, it also went on to consider whether "[t]he contract

restrain[ed] defendant from engaging in a lawful profession, trade, or

business within the meaning of [Section 16600]." ld. at 694. On this point,

the court found that "[i]t clearly appears from the terms of the contract that

5

it did not prevent defendant from carrying on a weekly credit business or

any business." Id. In other words, the incantation of a trade secret was not

dispositive; the Supreme Court also analyzed the extent to which the

specific contract at issue prevented a former employee from carrying on his

business. A per se rule enforcing only those restrictive covenants that are

necessary to protect trade secrets is inconsistent with the Gordon analysis.

Gordon teaches that the test should not tum on a trade secrets "exception,"

but rather on the recognition that nondisclosure agreements and related

restrictive covenants typically do not place enough of the market off-limits

that a person is retrained from engaging in his or her trade.

The narrow restraint doctrine is rooted in two decisions, Boughton v.

Socony Mobil Oil Co., 231 Cal. App. 2d 188,192 (1964) and King v.

Gerold, 109 Cal. App. 2d 316, 318 (1952). In Boughton, the court found

enforceable a contract that barred the plaintiffs from running a service

station on a particular parcel ofland. 231 Cal. App. 2d at 192. The

Boughton court reasoned:

While the cases are uniform in refusing toenforce a contract wherein one is restrainedfrom pursuing an entire business, trade orprofession, as falling within the ambit of section16600, where one is barred from pursuing onlya small or limited part of a business, trade orprofession, the contract has been upheld asvalid.

Id. In King v. Gerold, the court held that a manufacturer's agreement not to

produce a specific trailer design after the expiration of a licensing

agreement did not violate Section 16600, because the contract did not

6

preclude plaintiff "from carrying on his lawful business ofmanufacturing

trailers." 109 Cal. App. 2d at 318.

Based on this reasoning, the Ninth Circuit has concluded that the

statute does not nullify "every part of every contract that restricts a person

from pursuing, in whole or in part, any trade, business or profession."

General Commercial Packaging, Inc. v. TPS Package Engineering, Inc.,

126F.3d 1131, 1132 (9thCir.1997). Rather:

Even though the California Legislature rejectedthe common-law rule that "reasonable"restraints of trade are generally enforceable, itdid not make all restrictions unenforceable ...."While the cases are uniform in refusing toenforce a contract wherein one is restrainedfrom pursuing an entire business, trade orprofession ..., where one is barred frompursuing only a small or limited part of thebusiness, trade or profession, the contract hasbeen upheld as valid."

Id. (quoting Campbell v. Board ofTrustees ofLeland Stanford Junior

Univ., 817 F.2d 499,502 (9th Cir. 1987) and Boughton v. Socony Mobil Oil

Co., 231 Cal. App. 2d 188 (1964)).

The facts of General Commercial Packaging, Inc. v. TPS Package

Engineering, Inc. are illustrative of the rational for the narrow restraint

analysis. General Commercial Packaging ("General Commercial") was

hired by its long-standing customer, Walt Disney Companies ("Disney"), to

package materials for transport to the new EuroDisneyland, and sought a

subcontractor to help. 126 F.3d at 1132. General Commercial chose TPS

Packaging ("TPS"), who agreed that for one year after termination of the

contract, it would not work directly for, or solicit Disney or any other

7

company which General Commercial had introduced and contracted to

TPS. Id. at 1134. Every other customerfor packaging services was fair

game for TPS to serve. With this agreement in place, General Commercial

Packaging introduced TPS to Disney and its specialized needs.

Before long, TPS began working directly for Disney, and General

Commercial sued. Id. at 1132. The Ninth Circuit enforced the contract,

holding: "Apart from Disney, TPS was not barred from soliciting work

from any firm with which it had a prior relationship. The contract thus only

limits TPS's access to a narrow segment of the packing and shipping

market." !d. at 1134. See also International Business Machines Corp. v.

Bajorek, 191 F.3d 1033 (9th Cir. 1999) (applying narrow restraint

doctrine); Campbell v. Bd. ofTrustees ofLeland Sanford Junior Univ., 817

F.2d 499,502 (9th Cir. 1999) (only restraints that prevent one from

engaging in a lawful profession, trade or business are unlawful); Latona v.

Aetna Us. Healthcare Inc., 82 F. Supp. 2d 1089 (C.D. Cal. 1999)

(applying narrow restraint doctrine).

B. The Analysis Of A Restrictive Covenant Should BeginWith A Determination Of Whether Trade Secrets Or TheStatutory Exceptions Are Involved, But Should Not EndThere. Rather, The Issue Is Whether There Is ALimitation On Specific Conduct Rather Than A TrueRestraint Of Competition.

The thoughtful approach in Loral Corp. v. Moyes, 174 Cal. App. 3d

268 (1985) demonstrates that the analysis does not end upon a

determination of whether trade secrets2 are implicated or the statutory

2 The Edwards court recognized that it has long been the law that restrictivecovenants are valid to the extent they are necessary to protect trade secrets.142 Cal. App. 4th at 609.

8

exceptions apply. In Loral, the challenged contract provided, in relevant

part:

As a condition for the foregoing payments, youwill preserve the confidentiality of all tradesecrets and other confidential information ofLoral Corporation, Conic Corporation, and itsTerraCom Division, and you will not now or inthe future disrupt, damage, impair or interferewith the business of Conic Corporation, or itsTerraCom Division whether by way ofinterfering with or raiding its employees,disrupting its relationships with customers,agents, representatives or vendors or otherwise.You are not, however, restricted from beingemployed by or engaged in a competingbusiness.

fd. at 274. PlaintiffLoral Corporation filed a lawsuit alleging that a former

executive, Robert Moyes, had breached this agreement by inducing

employees to work for Moyes' new employer.

The Loral court rejected Moyes' defense that the contract was

unenforceable. First, the court recognized that while trade secret concerns

may prohibit the solicitation of certain customers, "a contract may prohibit

more than the law of the marketplace otherwise would." fd. at 275

(emphasis added). In other words, an enforceable nonsolicitation

agreement may go beyond the protection of trade secrets under California

law. fd. (citing Aetna Bldg. Maintenance Co. v. West, 39 Cal. 2d 198, 203

(1952). Similarly, the court noted that while the law of unfair competition

may bar the solicitation of employees under certain circumstances, Moyes'

contract went beyond this protection as well, and prohibited all employee

solicitations, including those that were otherwise lawful. !d. at 275-76.

9

Nevertheless, the Loral court continued to analyze the contract's viability,

recognizing that "reasonably limited restrictions which tend more to

promote than restrain trade and business do not violate the statute." ld. at

276.

Thus, even though Moyes' contract went beyond the parameters of

trade secret and unfair competition law, and even though it limited the way

in which he could compete with his former employer, it was not necessarily

void. The Loral court reasoned:

The potential impact on trade must beconsidered before invalidating a noninterferenceagreement. A contract must be construed to belawful if possible. Defendant is restrained fromdisrupting, damaging, impairing or interferingwith his former employer by raiding Conicemployees under his termination agreement.This does not appear to be any more ofasignificant restraint on his engaging in hisprofession, trade or business than a restraint onsolicitation ofcustomers or on disclosure ofconfidential information. "[T]he May 4thagreement expressly permits Moyes to beemployed by or engage in a competingbusiness."

!d. at 278-79 (emphasis added). Thus, the Loral court concluded:

The restriction presumably was sought byplaintiffs in order to maintain a stable workforce and enable the employer to remain inbusiness. This restriction has the apparentimpact oflimiting Moyes' business practices ina small way in order to promote Conic'sbusiness. This noninterference agreement hasno overall negative impact on trade or business.We hold that this contract, as construed, is not

10

void on its face under Business and ProfessionsCode section 16600.

Id. at 280.

Unlike the Edwards decision below, the Loral court followed a step­

by-step evaluation that was consistent with precedent and the language of

Section 16600. 3 Other decisions are consistent. John F. Matull &

Associates, Inc. v. Cloutier, 194 Cal. App. 3d 1049, 1054 (1987) (while

Section 16600 "invalidates agreements which penalize a former employee

for obtaining employment with a competitor, it does not necessarily affect

an agreement delimiting how that employee can compete."); Jones v.

Humanscale Corp., 130 Cal. App. 4th 401, 411 (2005) (arbitrator's

decision upholding restrictive covenant was not palpably erroneous under

California law) (citing Gordon v. Landau, 49 Cal. 2d 690 (1958)).4

C. Section 16600 Does Not Necessarily Invalidate AnAgreement Delimiting How An Employee Can Compete:Several Concrete Factors May Be Used To AnalyzeRestrictive Covenants.

With this precedent in mind, this Court should craft a clear

framework to analyze the viability of restrictive covenants. The analysis

should begin with the general proposition that when interpreting a

3 The Edwards court failed to distinguish Loral, suggesting incorrectly thatit was decided solely on the basis that Loral possessed trade secrets.Edwards, 142 Cal. App. 4th at 615.4 See also Golden State Linen Serv., Inc. v. Vidalin, 69 Cal. App. 3d 1, 9(1977) (noncompete enforceable "insofar as it provides the affectedemployee will not solicit [the employer's] customers after leaving itsemploy"); Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1462 (2002)("Further, Business and Professions Code section 16600 generally does notinvalidate a noncompetition agreement that merely prohibits solicitation ofthe former employer's customers.") (citation omitted).

11

contractual provision, a court "must ... construe[] [it] to be lawful if

possible." Loral Corp., 174 Cal. App. 3d at 278-79 (citing Cal. Civ. Code

§§ 1643,3541). From there, the Court should examine the actual text of

the contract and the surrounding circumstances, in light of the following

factors:

• Confidential Information/Unlawful Conduct: Does thecontract protect a party's confidential, proprietary, or tradesecret information? How valuable is the confidentialinformation? How essential is the provision to protectingagainst the employee's ability to place the information atrisk? Does the contract guard against unlawful conduct orunfair competition?

• Scope ofthe Restriction: Is the restriction reasonable,evaluated in terms of the employer, the employee and thepublic? Does the agreement merely delimit how a formeremployee can compete? Is the provision more like a"noncompetition agreement which is invalid, or anondisclosure or nonsolicitation agreement which may bevalid"? Loral, 174 Cal. App. 3d at 268.

• Impact On Trade: How does the agreement impact trade?Does the contract contain reasonably limited restrictionswhich tend more to promote than restrain trade and business?Does the agreement have an overall positive or negativeimpact on trade or business? Does the restriction impactbusiness practices in a limited way in order to promote theemployer's business?

• Other Employment: Does the contract penalize a formeremployee from obtaining employment with a competitor orengaging in a competing business? Does the restrictionimpose only modest limitations in the manner in which theemployee can perform services for a competitor? How is theperson hampered from seeking employment?

By applying these factors to the facts in a particular case, a court can

determine whether particular covenants fall within the prohibitions of

12

Section 16600. While this approach requires greater factual inquiry than

the per se rule in Edwards, it is a more reasonable approach and is

consistent with the case-by-case approach required in many areas oflaw.

In comparison, Edwards' bright-line rule is unreasonable and threatens to

sacrifice enforceable covenants in favor of an improper rule of absolute

certainty. This is too great a price.

D. Public Policy Supports Narrow Restraints.

Policy concerns support the narrow restraint doctrine because it is

the only approach that balances all of the public policy goals implicated by

Section 16600. The Court of Appeal focused only on the importance of

employee mobility and the possibility that under a narrow restraint

framework, employers have an incentive to push the envelope of the

"narrowness" requirement, leaving employees with the task of guessing

whether a court might find a particular restriction enforceable. While

unfettered employee mobility is an important objective in California, it is

not the only legitimate concern.

Certain restrictive covenants have positive effects on trade and offer

both businesses and employees significant advantages. Two of the most

important objectives are encouraging corporate investment in employee

talent and client relationships, and protecting confidential information. For

example, a small financial services firm may hire and train a worker to

service a key client who provides most of the firms' revenue, but has very

little impact on the overall financial services market. Hoping to protect its

business, the firm may ask the employee to sign an agreement not to solicit

or perform work for the client for a reasonable time after leaving. If this

13

agreement has no impact on the employee's ability to engage in his

profession, trade, or business after leaving the firm, it should be enforced.

Under this scenario, the company benefits by building a strong client

base and protecting confidential information about its client. The client

benefits from having a consistent contact at the firm who is familiar with its

preferences and needs. The worker benefits by learning how to manage a

key client relationship over time. This is likely to increase the worker's

earning power and marketability. Without an enforceable restrictive

covenant, the now more valuable worker can use his new knowledge and

established client relationship to take the client to a competitor. Because

the first employer would never realize a return on its investment in training

the employee and fostering his client relationship, the lack of an

enforceable restrictive covenant would provide a disincentive to making

such investments in the first place.5

Narrowly drafted restrictive covenants may be the only sure way to

protect trade secrets and valuable confidential information, while adding

5 See generally Eric A. Posner & George G. Triantis, Covenants not toCompete from an Incomplete Contracts Perspective, at 1 (John M. OlinProgram in Law & Economics Working Paper Series, No. 137, 2d Series,2001), available at http://www.law.uchicago.edu/Lawecon/index.html(employers who invest in an employee's training often will not recoup thisinvestment through the employee's improved skills for many years after thetraining is complete); Norman D. Bishara, Covenants not to Compete in aKnowledge Economy: Balancing Innovation from Employee MobilitvAgainst Legal Protection for Human Capital Investment, 27 Berkeley J.Emp. & Lab. L. 287, 296 (2006) ("It is then no surprise that employers andinvestors want assurance that their investment in talented employees issecure. This is especially true when employees might leave the firm, strikeout on their own, and compete with the firm that helped them developvaluable skills in the first place.").

14

clarity to the bargaining process and conserving judicial resources.

Consider for example, an employee who, for one employer, develops a glue

for a highly specialized application through an expensive trial and error

process. After many years, the employee leaves to work for a competitor,

where he is told to develop a glue for the same application. The employee

starts the new job, eager to do his best work for the new employer, but

comes to realize that he is unable to develop the glue without drawing upon

what he learned at the first employer. He has two choices: (1) remove

himself from the assignment and risk termination; or (2) continue to work

on the competing product and risk litigation. Even if the employee chooses

the latter approach with the purest intentions, he unwittingly may rely on

his former employer's trade secrets.

Costly litigation is likely to follow. The employee may lose his job,

the second employer may lose the lawsuit, and the first employer may

suffer irreparable injury, especially if it is too late for injunctive relief and if

monetary damages are impossible to quantify. All of the parties in this

scenario would have benefited from a narrow restrictive covenant, like the

agreement in King v. Gerold, specifying that the employee is free to

compete, so long as he does not work on the same type of glue he perfected

for the prior employer. Then, each would have bargained with clarity as to

the parameters of the employee's limitations and the first employer's

interests. Litigation would have been avoided and judicial efficiency

served.6

6 This hypothetical was inspired by National Starch and Chemical Corp. v.Parker Corp., 219 N.J. Super. 158 (1987). There, the employer had notprotected itself through a noncompete. Recognizing the dilemma of the

15

The narrow restraint doctrine has been good law for many years.

Countless employers have relied upon it when drafting employment

contracts and severance agreements. If this Court affirms the Edwards'

decision, plaintiffs' counsel will argue that all of these agreements are per

se void. This in tum will increase litigation, as former employees file

innumerable interference claims like those asserted by Mr. Edwards, even

though their agreements were consistent with the law at the time.

As even the Edwards Court ofAppeal acknowledged, "[I]t is not

difficult to imagine situations in which making only a few clients offlimits

would greatly limit competition, whereas under different circumstances a

much broader restriction could leave a substantial portion of the market

open." 142 Cal. App. 4th at 622. This exact reasoning supports a case-by­

case analysis, in which facts are examined to determine whether a particular

covenant is reasonable in light of the circumstances. A bright-line rule that

ignores such nuances would be a disservice to employers, employees, and

society alike, and would impose restraints on employers that the legislature

employee who simply could not perform part ofhis new job withoutplacing trade secrets at risk, the court granted injunctive relief under thedoctrine of inevitable disclosure. Amici Curiae here do not invite suchjudicial activism. The California Court ofAppeal has rejected theinevitable disclosure doctrine, noting in Whyte v. Schlage Lock Co., 101Cal. App. 4th 1443, 1462-63 (2002) that the chief ill is its after-the-factnature: it is imposed after the employment contract is made and thereforealters the employment relationship without the employee's consent.Conversely, a narrow contractual restriction permits the parties to negotiatetheir affairs from the beginning with a complete understanding andagreement as to their expectations and limitations.

16

did not impose in enacting Section 16600. Noncompetes are not per se

anticompetitive, and should not be rejected outright.7

E. IfThis Court Rejects The Narrow Restraint Doctrine,That Rule Should Be Prospective Only.

A rejection of the narrow restraint doctrine will be a dramatic

departure from a line of precedent on which many employment contracts

have been based. This Court has on many occasions made such dramatic

changes prospective only. Woods v. Young, 53 Cal. 3d 315,330 (1991)

(Prospective application only because of reliance on prior body oflaw and

unforeseeability of change; "Considerations of fairness and public policy

may require that a decision be given only prospective application."

7 Whether Section 16600 has fueled the unprecedented growth of SiliconValley is a subject of serious debate. See, supra, 27 Berkeley J. Emp. &Lab. L., at 308-09 (citing Ronald J. Gilson, The Legal Infrastructure ofHigh Technology Industrial Districts: Silicon Valley, Route 128, andCovenants not to Compete, 74 N.Y.U.L. Rev. 575 (1999)(other citationsomitted». The economic boom in Silicon Valley also may be attributed toa culture that views failure positively, easy access to numerous jobopportunities in the same general area, post-WWII government investmentin research, and contributions from nearby universities. Id. Many statesthat allow reasonable restrictive covenants have seen economic success inindustries ranging from pharmaceuticals to financial services. Conversely,not all states with strict prohibitions against noncompetes have experiencedthe economic success of California. North Dakota has a law so similar toSection 16600 that California decisions are considered persuasive authority.Werlinger v. Mutual Servo Cas. Ins. Co., 496 N.W.2d 26, 30 (N.D. 1993)(citations omitted); N.D. CENT. CODE § 9-08-06 ("every contract by whichanyone is restrained from exercising a lawful profession, trade, or businessof any kind is to that extent void," except when restraint is in connectionwith the sale of a business or dissolution of a partnership). However, NorthDakota has yet to replicate the success of Silicon Valley. This suggests thatforces beyond Section 16600 are responsible for California's economy.Ubiquitous stock option grants and the temperate climate are equally likelyto have played a part.

17

[citations omitted]); In re: Marriage ofBrown, 15 Cal. 3d 838,850 (1976)

(Retroactivity "might reopen controversies long settled"). If for any reason

this Court were to agree with the Court of Appeal and expressly reject the

narrow restraint doctrine, this Court should clarify that this rule would be

prospective only.

III. RELEASES ARE NOT VOID SIMPLY BECAUSE THEY DONOT STATE THE OBVIOUS ("THIS RELEASE DOES NOTAPPLY TO CLAIMS THAT CANNOT BE WAIVED.") ORTHE IMPOSSIBLE (LIST EVERY CONCEIVABLE CLAIMTHAT CANNOT BE RELEASED).

A. Stating The Obvious Is Meaningless: Any Attempt ToApply A General Release To Claims Which Cannot As AMatter Of Law Be Released Would Be Void As To ThoseClaims, But Otherwise Valid.

Consider the following alternatives:

Alternative No.1

Employee agrees to release the Company fromall claims or demands Employee may havebased on Employee's employment with theCompany or the termination of thatemployment. This includes a release of anyrights or claims Employee may have under theAge Discrimination in Employment Act,Title VII of the Civil Rights Act of 1964, theEqual Pay Act, or any other federal, state orlocal laws or regulations prohibitingemployment discrimination. This also includesa release by Employee of any tort or contractclaims for wrongful discharge.

Alternative No.2

Employee agrees to release the Company fromall claims or demands Employee may havebased on Employee's employment with theCompany or the termination of that

18

employment. This includes a release of anyrights or claims Employee may have under theAge Discrimination in Employment Act,Title VII of the Civil Rights Act of 1964, theEqual Pay Act, or any other federal, state orlocal laws or regulations prohibitingemployment discrimination. This also includesa release by Employee of any tort or contractclaims for wrongful discharge. This releasedoes not release claims that as a matter oflawcannot be released.

With respect to an average employee offered a severance payment in

exchange for a release of legal claims, there is no real-world difference

between Alternative No.1 and Alternative No.2. If the employee consults

an attorney, under Alternative No.1 the attorney will explain that rights

such as indemnification rights cannot be released as a matter oflaw, and

with respect to Alternative No.2, will tell the employee the same thing. If

the employee does not consult an attorney, there will be no difference

whatsoever between Alternative No.1 and Alternative No.2 - the

employee will not have the faintest idea what claims cannot be released as a

matter oflaw.

This Court should therefore state the obvious: Any attempt to apply

a general release to claims which cannot as a matter of law be released

would be void as to those claims, but otherwise valid.

B. It Is Impossible To List All Claims Which Cannot BeWaived.

The Court ofAppeal appeared to believe it would be a simple matter

to add a provision such as the following to all releases: "This release does

not release claims which as a matter oflaw cannot be waived, including

19

claims to indemnity rights under Labor Code Section 2802." Well and

good - that would be easy to do. But there are innumerable other claims

that under federal and state law as a matter of law cannot be waived.

Examples include:

• Wages due: No release of claims for wages due. CAL. LAB.

CODE § 206.5.

• Workers' compensation: No release of workers'

compensation claims without approval by appeals board or

referee. CAL. LAB. CODE § 5001.

• Unemployment: No release of unemployment compensation

benefits except as provided in four code sections. CAL.

UNEMP. INS. CODE § 1342.

• FLSA: No release of claims under the FLSA without

supervision from the Secretary of Labor or court approval.

29 U.S.c. § 216(c); Barrentine v. Arkansas-Best Freight Sys.,

Inc., 450 U.S. 728, 740 (1981) ("Thus, we have held that

FLSA rights cannot be abridged by contract or otherwise

waived because this would 'nullify the purposes' of the

statute and thwart the legislative policies it was designed to

effectuate.").

• FMLA: Some courts hold no release of proscriptive or

substantive rights under the FMLA. 29 C.F.R. § 825.220(d);

No. 05-2336, Dougherty v. TEVA Pharms. USA, 2007 U.S.

Dist. LEXIS 27200, at *24-25 (E.D. Pa. 2007) (employee

20

may not waive proscriptive or substantive rights under

FMLA); cf Dierlam v. Wesley Jessen Corp., 222 F. Supp. 2d

1052, 1055 (N.D. Ill. 2002) ("no reason not to accept the

plain language of the regulation on its face and apply

§ 825.220(d) to bar enforcement of a general waiver of

FMLA rights").

• Title VII: No release of prospective claims under Title VII.

Richardson v. Sugg, 448 F.3d 1046, 1054 (8th Cir. 2006) ("A

number of other circuits have also held, relying on Gardner­

Denver, that persons may not contract away prospective

claims under Title VII.").

• ADEA: Release of age discrimination claims void if no right

to revoke set forth in release. 29 U.S.C. § 626(f).

The Court of Appeal's simplistic view that at a minimum the

employer could have expressly written that it was not requiring a waiver of

indenmification rights ignores the fact that its rationale (it is against public

policy for a general release not to specify as excluded from the release

claims that cannot be waived) is applicable to each and every claim that

cannot be covered by a release.

C. Requiring An Employer To List Every Claim ThatCannot Be Included In A General Release Is Contrary ToThe General Principle That Releases Should Be EasilyUnderstood.

Numerous courts and statutes have enunciated the principle that

release agreements should be written as simply as possible. See, e.g., the

Older Workers Benefit Protection Act, 29 U.S.C. § 626(f)(I)(A) (release of

21

ADEA claims is void unless the release "is written in a manner calculated

to be understood by [the] individual. ..."). Requiring terminated

employees and companies, large and small, who simply want to exchange

money for a promise not to sue, to draft complex agreements that exclude

from coverage each and every claim that under federal or state law is not

waivable is antithetical to public policy.

D. Competent Employee And Management Attorneys AndSophisticated Legal Treatises Have Long Advised ClientsTo Utilize Severance PaylRelease Agreements ContainingGeneral Releases.

It is important to keep a severance pay/release agreement as simple

as possible in the absence of a negotiated agreement where the employee is

represented by counsel. Clarity and understanding are the objective. The

typical standard form release does not include language stating the obvious

("This release does not cover claims that cannot be released.") or attempt a

laundry list of claims which cannot be released. It does include an

exemption for what an employee is most likely to be concerned about

("This release does not include, however, a release of Employee's right, if

any, to pension, health or similar benefits under the Company's standard

programs."). Such clear, understandable releases do not violate public

policy where there is no dispute between employer and employee about

indemnification, and both sides fully understand that the employee is giving

up whatever rights can be surrendered in exchange for severance pay.

Indemnification of business expenses is rarely an issue in the

negotiation of severance agreements. Many of the leading treatises,

including Justice Chin's, propose releases that do not contain language

excluding claims that cannot statutorily be waived.

22

E. IfFor Any Reason This Court Were To Agree With TheCourt OfAppeal That It Is Against Public Policy To OfferA SeverancelRelease Agreement That Does Not ExpresslyState That It Does Not Cover Unwaivable Claims, ThatRule Should Be Prospective Only.

A rule oflaw that any general release that does not expressly

exclude from its coverage claims that cannot statutorily be waived is

against public policy would be a dramatic change with respect to California

release law. As noted above, this Court often makes such dramatic changes

prospective only. Any decision to affirm the Court of Appeal on the release

issue should be prospective only.

IV. CONCLUSION

Covenants containing limited restrictions provide companies with an

incentive to invest in employee talent, training and experience with key

clients. Employees reap the rewards in the form of increased marketability

and earning power. Reasonably limited restrictions, which tend more to

promote than restrain trade should not be found to violate the

Section 16600. Further, the rules oflaw applicable to releases are ofvital

concern to California employers and employees. The Court of Appeal's

decision should be reversed, and the trial court's final judgment reinstated.

Dated: May II ,2007 Respectfully submitted,

PAUL, HASTINGS, JANOFSKY & WALKER LLP

By: --"'~'--~--'--'-- _Paul Grossman

Attorneys for Amici CuriaeCALIFORNIA EMPLOYMENT LAWCOUNCIL and ACTIVISION, INC.

23

CERTIFICATE OF WORD COUNT

Counsel certifies that, based on the Microsoft Word word counting

feature, the total number of words in this brief, including footnotes, is

7,808. Cal. Rules of Court, Rule 28.1(d)(I).

Dated: May fl, 2007 BY:~Paul Grossman

Attorneys for Amici Curiae CALIFORNIAEMPLOYMENT LAW COUNCILand ACTIVISION, INC.

24

PROOF OF SERVICE

I am employed in the City ofLos Angeles, County ofLos Angeles, State ofCalifornia. I am over the age of 18, and not a party to the within action. My businessaddress is as follows: 515 South Flower Street, 25th Floor, Los Angeles, California90071.

On May 11,2007, I served the foregoing document(s) described as:

APPLICATION FOR LEAVE TO FILE AN AMICI CURIAE BRIEF ANDPROPOSED AMICI CURIAE BRIEF IN SUPPORT OF DEFENDA1~T,

RESPONDENT, AND PETITIONER ARTHUR ANDERSEN LLP

on the interested parties by placing a true and correct copy thereof in a sealed envelope(s)addressed as follows:

SEE ATTACHED SERVICE LIST

VIA U.S. MAIL:

I am readily familiar with the firm's practice of collection and processing ofcorrespondence for mailing. Under that practice such sealed envelope(s) would bedeposited with the U.S. postal service on May II, 2007 with postage thereon fullyprepaid, at Los Angeles, California.

I declare under penalty ofpeJjury under the laws of the State of Californiathat the above is true and correct.

Executed on May 11,2007, at Los Angeles, California.

Virginia AllenType or Print Name

SERVICE LIST

Richard A. Love, Esq.Beth A. Shenfeld, Esq.Law Offices of Richard A. Lowe11601 Wilshire Boulevard, Suite 2000,Los Angeles, CA 90025Attorney for Plaintiff and AppellantRaymond Edwards II

Wayne S. Flick, Esq.Yury Kapgan, Esq.Latham & Watkins LLP633 West Fifth Street, Suite 4000Los Angeles, CA 90071-2007Attorneys for Defendant andRespondent Arthur Andersen LLP

Sharon A. McFadden, Esq.Arthur Andersen LLP33 West Monroe Street, Floor 18Chicago,IL 60603-5385(courtesy copy)Attorneys for Defendant andRespondent Arthur Andersen LLP

Jeffrey A. Berman, Esq.Sidley Austin LLP555 W. Fifth Street, Suite 4000Los Angeles, CA 90013-1010Amicus Curiae Attorneys

Clerk of the CourtCalifornia Court of AppealSecond District, Division Three300 South Spring StreetSecond FloorLos Angeles, CA 90013

Mark J. Poster, Esq.Robin Meadow, Esq.Greines, Martin, Stein & Richland LLP5700 Wilshire Blvd., Suite 375Los Angeles, CA 90036-3626Attorney for Plaintiff and AppellantRaymond Edwards II

Kristine L. Wilkes, Esq.Colleen C. Smith, Esq.Shireen M. Becker, Esq.Latham & Watkins LLP600 West Broadway, Suite 1800San Diego, CA 92101-3375Attorneys for Defendant andRespondent Arthur Andersen LLP

Erika C. Frank, Esq.General CounselCalifornia Chamber of Commerce1215 K Street, Suite 1400Sacramento, CA 95812-1736Amicus Curiae Attorneys

Scott H. Dunham, Esq.Christpher W. Decker, Esq.O'Me1veny & Myers LLP400 S. Hope StreetLos Angeles, CA 90071-2899Amicus Curiae Attorneys

Clerk of the CourtSuperior Court of Los Angeles111 N. Hill StreetLos Angeles, CA 90012