Noncompete clauses are a reality of the modern labor market as companies seek to keep their employees from using the experience and information they gain in one position from turning into a liability when those employees find jobs elsewhere. California law was a bit of an exception, as it appeared to limit the scope of these clauses, but the relevant statutes had been interpreted differently in the State and Federal court systems. Now, the California Supreme Court has issued a ruling (PDF) that holds that, with the exception of a few narrow situations explicitly spelled out by law, noncompete clauses have no legal standing.

The case is actually an offshoot of the Enron collapse, which took down consulting firm Arthur Anderson in its wake. One of Anderson's employees, Raymond Edwards, was offered a job by HSBC, which purchased his division from Anderson. The legal agreements involved with the transfer sparked a lawsuit. HSBC required Edwards to obtain a waiver of his noncompete with Anderson as a condition of employment; Anderson wouldn't waive it unless Edwards released it of "any and all" liabilities related to Edwards' work there. Thinking he might get caught up in the many lawsuits involved in the collapse of Enron and Anderson, Edwards refused to sign, lest he find himself footing his own legal bills. As a result, the job offer from HSBC was withdrawn.

Edwards sued, alleging a number of employment and contractual issues; after the case made its way through trial court and appeals, the Supreme Court was left to focus on two of these. The first was the "any and all" language. California employment law mandates that employers assume many specific liabilities, including legal responsibility for actions performed on their behalf. The court simply ruled that, since these liabilities can't be legally waived, the "any and all" language is assumed to exclude these—in short, any and all should be read to mean "any and all that are legally permissible."

But the more significant ruling came when the noncompete clause itself was considered. The California legal code promotes employment mobility by stating, "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 exceptions focus largely on the actions of principals when corporations or partnerships are dissolved.

State courts had largely interpreted this outlawing any agreement that placed any constraint on employment. But the US court system (the Ninth Circuit includes California) had read this statute to be in line with the laws prevailing in other states, interpreting "restrain" to mean "prohibit." Thus, according to the Ninth Circuit, only agreements that blocked all employment in a field were invalid.

This was the California Supreme Court's chance to clarify the situation, and the Justices took the opportunity to issue a definitive ruling. "The agreement restricted Edwards from performing work," they wrote in determining, "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."

The decision doesn't apply to other states but, given that the state Supreme Court is expected to be the ultimate authority on state law, it's likely that future Ninth Circuit rulings will follow this ruling. It's especially significant given that California is home to a lot of software companies. Noncompetes are the norm in this field, as the property involved is mostly intellectual. The difficulty of determining what exactly competes with a software company or web service could have acted as a significant deterrent to employee mobility.