Arthur Andersen Opening Brief On The Merits

Case No.
S147190
IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA
RAYMOND EDWARDS II,

Plaintiffand Appellant,
v.
ARTHUR ANDERSEN LLP,

Defendant and Respondent.
OPENING BRIEF ON THE MERITS
After a Decision by the Court of Appeal,

Second Appellate District, Division Three
Case No. B 178246
Los Angeles Superior Court Case No. BC 255796

Honorable Andria K. Richey, Judge
Wayne S. Flick (SBN 149525) Kristine L. Wilkes (SBN 116693)

Yury Kapgan (SBN 218366) Colleen C. Smith (SBN 231216)
LATHAM & WATKINS LLP Shireen M. Becker (SBN 237930)
633 West Fifth Street, Suite 4000 LATHAM & WATKINS LLP
Los Angeles, California 90071-2007 600 West Broadway, Suite 1800
Tel.: (213) 485-1234 San Diego, California 92101-3375
Fax: (213) 891-8763 Tel.: (619) 236-1234
wayne.s .flick@lw.com Fax: (619) 696-7419
kristine.wilkes@lw.com
Sharon A. McFadden, Esq.

ARTHUR ANDERSEN LLP
33 West Momoe Street, Floor 18
Chicago, IL 60603-5385
TABLE OF CONTENTS
I. ISSUES PRESENTED 1
II. INTRODUCTION AND SUMMARY OF ARGUMENT 1
III. STATEMENT OF THE CASE 5
A. The Non-Compete Agreement 5
B. The Termination Of Non-Compete Agreement.. 6
C. The HSBC Transaction 7
D. Procedural History 8
IV. ARGUMENT 12
A. Contrary To The Court Of Appeal's Decision, The

Non-Compete Agreement Is A Lawful Restraint
On Trade Outside The Prohibition Of Section
16600 12
1. Section 16600 Does Not Bar All Employee

Non-Competition Agreements 13
a. The plain language of Section 16600

permits non-competition agreements
that do not prevent one from engaging
in his profession 13
b. The case law confirms Section

16600's plain meaning that non-
competition agreements are lawful
unless they preclude pursuit of a
business, trade or profession 18
c. The Ninth Circuit's "narrow restraint"

doctrine correctly interprets Section
16600 28
1
d. The legislative history of Section
16600 confirms the intent to bar only
prohibitions on engaging in a
business, trade or profession 31
e. Out-of-state authority supports

tailored competitive restraints
protecting customer relationships 36
2. The Court Of Appeal Erred In Concluding

That The Non-Compete Agreement Was
Unlawful 40
a. The first restriction in the Agreement

was lawful 41
b. The second restriction in the

Agreement was lawful 44
B. Contrary To The Court Of Appeal's Decision, The

TONC Is A Lawful, Standard Form Release 46
1. Under The Labor Code, The TONC Release

Provision Could Not Waive Employee
Indemnification Rights 47
2. The Court Of Appeal's Interpretation Of

The TONC Violated Fundamental Tenets Of
Contract Interpretation 55
a. The Court of Appeal improperly

implied a waiver of employee
indemnification rights where none
existed 55
b. The Court of Appeal improperly read

the TONC to be unlawful 57
11
3. The Court Of Appeal's Interpretation Of
The TONC Has Far-Reaching Adverse
Consequences And Leads To An Absurd
Result 60
C. Both The Non-Compete Agreement And The

TONC Were Lawful Contracts, And Therefore
Cannot Form A Basis For Tort Liability 63
V. CONCLUSION 65
111
TABLE OF AUTHORITIES
Page(s)
CASES
Adv. Bionics Corp. v. Medtronic, Inc.,

29 Cal. 4th 697 (2002) 23
Azteca Constr., Inc. v. ADR Consulting, Inc.,

121 Cal. App. 4th 1156 (2004) 62
Baker Pacific Corp. v. Suttles,

220 Cal. App. 3d 1148 (1990) .49, 51
Baskin-Robbins Inc. v. Patel,

264 F. Supp. 2d 607 (N.D. Ill. 2003) 29
BDO Seidman v. Hirshberg,

712 N.E.2d 1220 (N.Y. 1999) 38,39
Bosley Med. Group v. Abramson,

161 Cal. App. 3d 284 (1984) 14, 17,32
Boughton v. Socony Mobil Oil Co.,

231 Cal. App. 2d 188 (1964) passim
Brandt v. Lockheed Missiles & Space Co.,

154 Cal. App. 3d 1124 (1984) 56
Brown v. Kling,
101 Cal. 295 (1894) 21, 35
Byrne v. Laura,
52 Cal. App. 4th 1054 (1997) 59
California Steam Navigation Co. v. Wright,

6 Cal. 258 (1856) 34
Campbell v. Bd. of Trustees ofLeland Stanford Junior Univ.,

817 F.2d 499 (9th Cir. 1987) 14, 28
Cardiovascular Surgical Specialists, Corp. v. Mammana,

61 P.3d 210 (Okla. 2002) 37
IV
Page(s)
Centeno v. Roseville Cmty. Hosp.,
107 Cal. App. 3d 62 (1979) , 32
Chamberlain v. Augustine,
172 Cal. 285 (1916) 19,20,21,22
City of Torrance v. Workers' Compo Appeals Bd.,

32 Cal. 3d 371 (1982) .49
County ofMarin v. Assessment Appeals Bd.,

64 Cal. App. 3d 319 (1976) 59
County ofRiverside v. Super. Ct.,

27 Cal. 4th 793 (2002) 61, 62
D.A. Schulte, Inc. v. Gangi,

328 U.S. 108 (1946) 61
D'Sa v. Playhut, Inc.,

85 Cal. App. 4th 927 (2000) 25, 65
Dam, Snell & Taveirne, Ltd. v. Verchota,

324 Ill. App. 3d 146 (2001) 39
Della Penna v. Toyota Motor Sales, US.A., Inc.,

11 Cal. 4th 376 (1995) 64
Dobbins, DeGuire & Tucker, P. C. v.

Rutherford, MacDonald & Olsen,
708 P.2d 577 (Mont. 1985) 37, 38
Dunlop v. Gregory,
10 N.Y. 241 (1851) 34
E.E. O. C. v. Cosmair, Inc. v. L 'Oreal Hair Care Div.,

821 F.2d 1085 (5thCir. 1987) 61
Edwards v. Arthur Andersen LLP,

47 Cal. Rptr. 3d 788 (2006) passim
Ex parte Howell Eng 'g & Surveying, Inc.,

2006 Ala. LEXIS 346 (Ala. Dec. 15,2006) 37
v
Page(s)
Fitch v. Select Prods. Co.,

36 Cal. 4th 812 (2005) 14
Gen. Commercial Packaging, Inc. v. TPS Package Eng'g, Inc.,

126 F.3d 1131 (9th Cir. 1997) 29, 30,44
Golden State Linen Serv., Inc. v. Vidalin,

69 Cal. App. 3d 1 (1977) 24, 45
Gordon Termite Control v. Terrones,

84 Cal. App. 3d 176 (1978) 27
Gordon v. Landau,
49 Cal. 2d 690 (1958) passim
Hill Med. Corp. v. Wycoff,

86 Cal. App. 4th 895 (2001) 31, 32
Howard v. Babcock,
6 Cal. 4th 409 (1993) 23,24, 33
Int '1 Bus. Mach. Corp. v. Bajorek,

191 F.3d 1033 (9th Cir. 1999) 27, 29, 44
Jefferson v. Cal. Dep't ofYouth Authority,

28 Cal. 4th 299 (2002) 61
John F. Matull & Assocs., Inc. v. Cloutier,

194 Cal. App. 3d 1049 (1987) 23
Jon~s v.Humanscale Corp.,

130 Cal. App. 4th 401 (2005) 22, 57
King v. Gerold,
109 Cal. App. 2d 316 (1952) 20, 28
Korea Supply Co. v. Lockheed Martin Corp.,

29 Cal. 4th 1134 (2003) 9,63
Latona v. Aetna Us. Healthcare Inc.,

82 F. Supp. 2d 1089 (C.D. Cal. 1999) 30,40
VI
Page(s)
Little v. Auto Stiegler, Inc.,

29 Cal. 4th 1064 (2003) 61
Loral Corp. v. Moyes

174 Cal. App. 3d 268 (1985) passim
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Chung,

2001 WL 283083 (C.D. Cal. 2001) 29
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Ran,

67 F. Supp. 2d 764 (E.D. Mich. 1999) 38
Metro Traffic Control, Inc. v. Shadow Traffic Network,

22 Cal. App. 4th 853 (1994) 23, 25
Mont. Mountain Prods. v. Curl,

112 P.3d 979 (Mont. 2005) 37
Moore v. Bonnet,
40 Cal. 251 (1870) 35
Morlife, Inc. v. Perry,

56 Cal. App. 4th 1514 (1997) 23
Morris v. Harris,
127 Cal. App. 2d 476 (1954) .43
Muggill v. Reuben H. Donnelley Corp.,

62 Cal. 2d 239 (1965) 27
People v. Standish,
38 Cal. 4th 858 (2006) 17
Perry v. Moran,
748 P.2d 224 (Wash. 1987) 39
Rodriguez v. Barnett,
52 Cal. 2d 154 (1959) 59
VB
Page(s)
S. Tahoe Gas Co. v. Hofmann Land Improvement Co.,

25 Cal. App. 3d 750 (1972) 59
Saala v. McFarland,
63 Cal. 2d 124 (1965) 32
Sierra Vista Reg 'I Med. Ctr. v. Bonta,

107 Cal. App. 4th 237 (2003) 55
Smith v. Amedisys Inc.,

298 F.3d 434 (5th Cir. 2002) 62
South Bay Radiology Med. Assocs. v. Asher,

220 Cal. App. 3d 1074 (1990) 32
Strong v. Theis,
187 Cal. App. 3d 913 (1986) 59
Swenson v. File,
3 Cal. 3d 389 (1970) 33
Thompson v. Impaxx, Inc.,

113 Cal. App. 4th 1425 (2003) 27
Thompson, Breeding, Dunn, Creswell & Sparks v. Bowlin,

765 S.W. 2d 743 (Tenn. App. 1987) 38
Vacco Indus., Inc. v. Van Den Berg,

5 Cal. App. 4th 34 (1992) 31,32
Warner & Co. v. Solberg,

634 N.W.2d 65 (N.D. 2001) 38
Werlinger v. Mut. Servo Cas. Ins. Co.,

496 N.W.2d 26 (N.D. 1993) 38
Wolf & Co. v. Waldron,

366 N.E. 2d 603 (Ill. App. 1977) 39
Wright v. Ryder,
36 Cal. 342 (1868) 31, 35
V111
Page(s)
STATUTES
Ala. Code. § 8-1-1 (2006) 37
Cal. Bus. & Prof. Code § 16600 passim
Cal. Bus. & Prof. Code § 16601 16
Cal. Bus. & Prof. Code § 16602 16, 23, 24, 33
Cal. Bus. & Prof. Code § 16602.5 16
Cal. Civ. Code § 1638 : 55
Cal. Civ. Code § 1643 58, 59
Cal. Civ. Code § 1668 51
Cal. Civ. Code § 1673 (1872) passim
Cal. Civ. Proc. Code § 1858 56, 57
Cal. Lab. Code § 206.5 15, 54, 61
Cal. Lab. Code § 215 54
Cal. Lab. Code § 225.5 54
Cal. Lab. Code § 2802 passim
Cal. Lab. Code § 2804 passim
Cal. Lab. Code § 2855 61, 62
IX
Page(s)
Cal. Lab. Code § 432.5 53
Cal. Lab. Code §§ 2800, et seq 62
Cal. Unemp. Ins. Code § 1342 61
Mich. Compo Laws Ann. § 445.761 38
Mont. Code Ann. § 28-2-703 37
Okla. Stat. tit. 15, § 217 37
OTHER AUTHORITIES
1 B. E. Witkin, Summary ofCalifornia Law,

Contracts § 750, p. 840 (10th ed. 2005) 58
17A C.J.S. Contracts, § 249 (2006) 36
54A Am. JUL 2d, Monopolies, § 888 , 36
Norman D. Bishara, Covenants Not to Compete in a Knowledge

Economy: Balancing Innovation from Employee Mobility Against
Legal Protection for Human Capital Investment,
27 Berkeley J. Emp. & Lab. L. 287 (2006) 25, 26
Justice Ming W. Chin, et aI.,

California Practice Guide: Employment Litigation
(The Rutter Group 2005) 47, 61
R. P. Davis, Annotation, Validity and enforceability

of restrictive covenants in contracts of employment,
98 A.L.R. 963 (1935) 36
Michael J. Garrison, Limiting the Protection for Employees

from Compelled Noncompete Agreements Under State
Whistleblower Laws: A Critical Analysis of
Maw v. Advanced Clinical Communications,
20 Lab. Law 257 (2005) 26
x
Page(s)
Stephen E. Kalish, Covenants Not to

Compete and the Legal Profession,
29 St. Louis U. L.J. 423 (1985) 24
William G. Porter II & Michael C. Griffaton, Using Noncompete

Agreements to Protect Legitimate Business Interests,
69 Def. Couns. J. 194 (2002) 26
Eric A. Posner & George G. Triantis, Covenants Not to Compete

From an Incomplete Contracts Perspective,
(John M. Olin Working Paper Series, No. 137 (2001)) 26
Ann Taylor Schwing,

2 California Affirmative Defenses § 47: 13 (2005 ed.) 61, 62
Note, Where Have You Gone, Law and Economics Judges?

Economic Analysis Advice to Courts, etc.,
66 Ohio St. L.J. 1105 (2005) 26
Xl
I. ISSUES PRESENTED
1. To what extent does Business and Professions Code
Section 16600 prohibit employee noncompetition agreements?
2. Does a contract provision releasing "any and all" claims
encompass nonwaivab1e statutory protections, such as the employee
indemnity protection of Labor Code Section 2802?
II. INTRODUCTION AND SUMMARY OF ARGUMENT
The Court has granted review on two issues that will
dramatically affect employment and other legal relationships in this
state. First, the Court will determine the degree to which employers
may protect their increasingly valuable human capital, client
relationships and proprietary information from raiding or
misappropriation by departing employees, through post-employment
restrictions which reasonably protect the employees' career
opportunities. Second, the Court will decide whether businesses will
face unforeseen liability based on the use of standard, widely-used
"any and all" release language. On both issues, the Court of Appeal
gravely erred, and the results it reached are unnecessary, undesirable
and in some respects, absurd.
1
In interpreting Business and Professions Code Section 16600
("Section 16600") as absolutely prohibiting employers from
protecting their property and client relationships through agreements
with their departing employees, the Court of Appeal improperly
amended the statute in several critical respects. First, as written,
Section 16600 does not prohibit all post-employment contractual
restrictions; its terms reach only contracts that prevent one from
engaging in his or her trade, business or profession. Narrowly drawn
post-employment restrictions, leaving open to an employee the
opportunity to engage in his or her profession, do not do so and are
thus outside the statute's prohibition. Second, the statute does not,
contrary to the Court of Appeal's construction, treat employment
contracts more restrictively than other contracts; the statute governs
"every contract" and does not single out employment contracts for
harsher review. Third, Section 16600 is part of a statutory scheme
containing express legislative exceptions, meaning that judicial
exceptions are not to be implied. However, to reconcile its absolute
prohibition with the extensive case authority allowing limited non-
competition agreements, the Court of Appeal was forced to engraft
judicially-created exceptions onto the statute's framework.
2
None of these machinations was necessary or warranted. Long-
standing precedent applying California law has successfully
reconciled the competing interests of employees' freedom to engage
in their occupation with employers' legitimate interest in protecting
their client and employee relationships, and proprietary information.
That precedent correctly reads Section 16600 as written: barring only
post-employment contracts that prevent one from engaging in his
chosen business or profession, while leaving room for narrow,
legitimate constraints.
Petitioner Arthur Andersen LLP's narrowly tailored Non-
Compete Agreement, leaving Respondent Raymond Edwards II free
to engage in his profession, is a valid agreement outside the
prohibition of Section 16600.
The Court of Appeal's other ruling under review is equally
anomalous. The court found that a contract in which an employee
releases "any and all" claims against his employer is unlawful despite
the seemingly universal use of such releases in settlement agreements.
The court reasoned that such an agreement is unlawful because-even
though the agreement is silent on employee indemnification rights-it
must be read impliedly to release such rights, which are unwaivable
3
under Labor Code Section 2802 ("Section 2802"). In other words, the
court implied an unwritten and unintended term into the agreement,
and then used its creation as a rationale to invalidate it. Making this
result even more astounding is the fact that-no matter what is
agreed-an employer cannot require an employee to waive
indemnification rights. Such an agreement is null and void under
Labor Code Section 2804 ("Section 2804").
The release in question simply did not waive employee
indemnification rights, so there was no basis for implying such a term.
And, it was particularly irrational to do so when the term implied by
the Court of Appeal was one that could have no legal effect. It is
axiomatic that contracts are to be read to incorporate all applicable
terms of law, which the parties are presumed to know, and that, where
possible, agreements must be read to be lawful, not unlawful.
Only by ignoring these principles, and reaching out to adopt an
interpretation that rendered the agreement unlawful, was the Court of
Appeal able to invalidate Andersen's Termination of Non-Compete
Agreement ("TONC"), which on its face was a valid, straightforward,
standard release, and which, by law, could not accomplish the
nefarious purpose attributed to it by the Court of Appeal.
4
'Because neither the Non-Compete Agreement nor the TONC
was unlawful, there was no "wrongful act" to support Edwards's
interference with prospective economic advantage claim. The trial
court thus properly entered judgment for Andersen. That judgment
should be reinstated.
III. STATEMENT OF THE CASE
In January 1997, Edwards received an offer from Andersen to
work as a tax manager in Andersen's Los Angeles office. Appellant's
Appendix ("App.") 386, 708-09. The offer letter requested that
Edwards review and sign a Non-Compete Agreement (sometimes
referred to herein as the "Agreement"), and advise if he had any
questions. App.708. Edwards signed and returned the Non-Compete
Agreement to Andersen without discussion. App. 386-87, 706. That
agreement remained in place, without question by Edwards, from
1997 until 2002, when the facts giving rise to this lawsuit arose.
A. The Non-Compete Agreement
The Agreement was a nationally-utilized document designed to
protect Andersen's client relationships, human capital and proprietary
information, and to prevent Andersen employees from capitalizing
upon those relationships or proprietary information upon departure.
5
After leaving, although allowed to be employed by any Andersen
client (and anyone else for that matter), managers agreed not to raid
Andersen's clients or steal propriety information. For a limited time,
they agreed not to perform services for a narrow segment of Andersen
clients, not to solicit business from certain clients, not to raid
Andersen employees, and not to disclose or use Andersen's
confidential trade secret information. App. 1275. Specifically, the
Agreement stated that it "does not prohibit you from accepting
employment with a client." Id. The Agreement confirmed: "It is not
our intent to limit your ability to pursue your professional career if
you leave the Firm. Id.
B. The Termination Of Non-Compete Agreement
By April 2002, Andersen was in negotiations to transfer several
of its service teams to other firms in connection with closing its public
accounting practice. App. 388,499,905. In extending employment
offers to Andersen personnel, these other firms generally required that
employees who had signed Non-Compete Agreements with Andersen
secure releases from those agreements as a condition of employment.
App. 500. Andersen generally agreed to releases of those agreements
in return for certain commitments, such as non-disparagement of
6
Andersen and cooperation in Andersen litigation in which the
employee might have some involvement. App. 500. This was
accomplished through a document entitled "Termination of Non-
Compete Agreement" or TONC. App. 500, 578-82. The TONC
made no mention of employee indemnification rights, and merely
included a standard release of "any and all" claims the employee
might have against Andersen, "except for claims ... for any accrued
and unpaid salary or other employee benefit or compensation owing to
Employee as of the date hereof." App.579.
C. The HSBC Transaction

In May 2002, Andersen began negotiating with HSBC
regarding HSBC's acquisition of a portion of Andersen's Los Angeles
tax practice. App. 390, 686-87. As part of that sale, Andersen
arranged for the employees in that group (including Edwards) to
obtain employment with HSBC; Edwards had no preexisting
relationship with HSBC, but was given the opportunity for
employment with HSBC through Andersen's sale of its practice.
HSBC required, however, that individuals accepting employment with
HSBC be released from any Andersen restrictive covenants. App.
539. Andersen utilized the TONC to accomplish the release. Under
7
the agreement between HSBC and Andersen, Andersen was required
to deliver to HSBC a signed TONC for every person subject to
restrictive covenants (including Edwards). App.539. However,
nothing in that agreement prohibited HSBC from hiring Edwards ifhe
did not obtain a release from Andersen by signing the TONC. See
App. 542-76.
On June 27 and July 8, 2002, Edwards received letters from
HSBC offering him employment. That offer contained a new non-
compete clause on behalf of HSBC and a requirement that Edwards
obtain, as a condition of employment, a release from any restrictive
covenants he had with Andersen. App. 633, 721-25, 392-93, 639-40,
733-37. Edwards signed the July 8 offer letter, but thereafter refused
to sign the TONC. App.392-93. As a result of Edwards's refusal to
sign the TONC, HSBC eventually withdrew its contingent
employment offer. App. 655, 800. There is no evidence that
Andersen participated in HSBC's decision to withdraw its offer to
Edwards.
D. Procedural History
On April 30, 2003, Edwards filed a complaint against
Andersen, HSBC and others. App. 1. Other than the interference
8
claim, all claims against Andersen have been dismissed through
demurrer or summary adjudication. Edwards's remaining interference
claim is predicated upon Andersen's alleged "wrongful acts" in
(1) refusing to release Edwards from the 1997 Non-Compete
Agreement without corresponding minimum commitments from
Edwards in the TONC (e.g., non-disparagement of Andersen and
cooperation in Andersen litigation which involved Edwards); and
(2) requiring Edwards to execute the TONC, both of which allegedly
prevented Edwards from obtaining employment with HSBC.!
The trial court granted Andersen's motion to sever purely legal
issues from factual issues and then held as a matter of law that both
agreements were lawful and did not constitute independently wrongful
acts because: (l) the Non-Compete Agreement was narrowly tailored,
did not deprive Edwards of his right to pursue his profession and
therefore was not unlawful under Section 16600; and (2) the TONC's
In California, the tort of interference with prospective economic

advantage requires proof that the defendant had knowledge of a pre-
existing economic relationship between the plaintiff and a third party
and intentionally acted to disrupt the relationship, resulting in
economic harm to the plaintiff. Korea Supply Co. v. Lockheed Martin
Corp., 29 Cal. 4th 1134, 1153 (2003). To recover damages, the
plaintiff must prove that the defendant acted wrongfully apart from
the interference itself See id. at 1153-54.
9
standard release is silent on the issue of statutory indemnification
rights (and all other unwaivable rights), and therefore could not
reasonably be interpreted as requiring a waiver of such rights. App.
2154; Reporter's Transcript ("RT") 173-79 (07/21/04). The trial court
therefore entered judgment for Andersen. App.2233.
Edwards appealed, arguing that the Non-Compete Agreement
and the TONC were unlawful in California, and therefore supported
his interference claim. Appellant's Opening Brief ("AOB") at 1. The
Court of Appeal reversed, holding that both agreements were
unlawful, and therefore could satisfy the "wrongful act" element of
Edwards's interference claim. Edwards v. Arthur Andersen LLP, 47
Cal. Rptr. 3d 788, 791.
First, the court held that the Agreement was invalid under
Section 16600 because it was a non-competition agreement which did
not fall within the express statutory or judicially-created exceptions to
the statute. Id. at 791. The court adopted a bright line rule, outlawing
all employee non-competition agreements regardless of their scope
and effect on the employee's ability to engage in his trade, business or
profession:
We conclude a noncompetition agreement between an

employee and employer, prohibiting the employee from
10
performing services for certain former clients, is invalid
under ... section 16600 unless it falls within the
statutory or "trade secret" exceptions to the statute. Such
a noncompetition agreement is invalid even if the
restraints imposed are narrow and leave a substantial
portion o/the market open to the employee. In so
holding, we conclude the "narrow restraint" exception to
section 16600, articulated by the Ninth Circuit, is not a
proper application of California law.
Id. (emphasis added).
Second, although the TONC makes no reference to Edwards's
indemnification rights, the Court of Appeal held the TONC to be
unlawful because, it concluded, the TONC impliedly waived those
rights. The court found an implied waiver (in the face of contractual
silence) even though such rights cannot be waived as a matter oflaw
under Sections 2802 and 2804:
We further hold that the TONC purported to waive

Edwards's Labor Code section 2802 indemnity rights.
Because Labor Code section 2802's indemnity provisions
implement public policy, requiring Edwards to waive
indemnity rights as a condition of continued employment
violated public policy and constituted an independently
wrongful act for purposes of the intentional interference
with prospective economic advantage claim.
Id. at 792.
Finally, the court found that because the Non-Compete
Agreement was unlawful, it was an independently wrongful act for
11
Andersen to ask Edwards to sign the TONC in exchange for releasing
him from the Non-Compete Agreement. Id. at 791.
On November 29, 2006, this Court granted review. On January
17,2007, the Court specified for review the two issues listed above.
IV. ARGUMENT
A. Contrary To The Court Of Appeal's Decision, The Non-

Compete Agreement Is A Lawful Restraint On Trade
Outside The Prohibition Of Section 16600
The Court of Appeal's determination that the Non-Compete
Agreement was invalid was based upon its sweeping, absolute reading
of Section 16600. The court held that Section 16600 proscribes all
employee non-competition agreements without differentiation, unless
the agreement falls within statutory or judicially-created "trade secret"
exceptions to the statute. Edwards, 47 Cal. Rptr. 3d at 796. As the
Court of Appeal acknowledged, this construction prohibits all
restrictions on employee competition (other than the limited
exceptions) even where the restriction leaves the employee free to
practice his trade or profession. Id. at 798. This approach rewrites the
plain statutory language, and defies the decisions of this Court, other
court of appeal opinions, and federal precedent construing California
law.
12
1. Section 16600 Does Not Bar All Employee Non-
Competition Agreements
a. The plain language of Section 16600 permits

non-competition agreements that do not
prevent one from engaging in his profession
The Court of Appeal's decision cannot be reconciled with either
the plain language or the structure of Section 16600 and related
sections. Contrary to the Court of Appeal's conclusion, Section
16600-by its very terms-does not prohibit all employee "non-

. . ,,2
competItIOn agreements.
Section 16600 does not discuss "non-competition agreements."
Rather, the section bars only agreements that prevent one from
engaging in his or her line of work, and such agreements are invalid
only to the extent that they do so. The statute states: "[E]very
2
The broad rubric of "non-competition agreements" is itself an
invitation to imprecise and erroneous analysis. As the case law makes
clear, used carelessly, this term may include entirely distinct forms of
agreement, ranging from a blanket prohibition against an employee
competing with his former employer by barring him from that field
entirely, to competitive restrictions with field, time or geographic
limitations, to restrictions against soliciting any clients of the former
employer, to restrictions on soliciting specific named clients or clients
specified by category. Thus, "non-competition agreements" may
encompass absolute agreements not to compete, as well as "non-
interference" and "non-solicitation" agreements. Many of these
agreements are imbued with trade secret considerations, as well,
which are inseparable from employers' investment in the people who
carry those secrets with them.
13
contract by which anyone is restrained from engaging in a lawful
profession, trade, or business of any kind is to that extent void." Cal.
Bus. & Prof. Code § 16600. Thus, by its plain terms Section 16600
does not ban all non-competition agreements: Section 16600 voids
contracts only to the extent that they prevent or preclude a person
from pursuing his or her vocation. See, e.g., Campbell v. Bd. of
Trustees ofLeland Stanford Junior Univ., 817 F.2d 499,502 (9th Cir.
1987) ("Section 16600 only makes illegal those restraints which
preclude one from engaging in a lawful profession, trade, or
business"); Bosley Med. Group v. Abramson, 161 Cal. App. 3d 284,
288 (1984) ("Section 16600 provides generally that contracts which
prevent anyone from engaging in a lawful profession, trade or
business are void.") (emphases added).3
If the Legislature intended to bar all non-competition
agreements, it could have done so in simple terms; the Legislature
knows how to impose a blanket ban when one is intended. Indeed,
3
While the Court of Appeal acknowledged the established
principle that when interpreting a statute, courts are to "follow the
Legislature's intent, as exhibited by the plain meaning of the actual
words of the law," Edwards, 47 Cal. Rptr. 3d at 800 (citing Fitch v.
Select Prods. Co., 36 Cal. 4th 812,818 (2005», the Court of Appeal
nevertheless failed to examine the language of Section 16600. Id.
14
two examples of statutes categorically rendering certain forms of
employment contracts invalid are discussed herein, Labor Code
Sections 2802 and 2804 (nullifying contracts purporting to waive
employee indemnification rights), and Labor Code Section 206.5
(nullifying and rendering unlawful contract requiring employee to
release claim for wages due). A comparison between the strict,
absolute language of those statutes and the limited reach of Section
16600 demonstrates the fallacy of the Court of Appeal's absolutist
interpretation.
The court's opinion disregards the plain language of the statute
in yet another critical way. The statute does not distinguish between
employment contracts and other contracts; the statute covers "every
contract" made by "anyone," without differentiation. Ignoring this
language, the Court of Appeal adopted a rule that applies to
employment contracts only. Edwards, 47 Cal. Rptr. 3d at 795-96,
802-03.
The result is untenable. Because the same rule must extend to
"every contract" given the statutory scope, the court's reading means
either that all non-competition agreements are barred (an approach
that would overturn a century of precedent allowing reasonable
15
restraints), or the court must read into the statute a limitation that
applies only to employment contracts (a limitation that is not
supported by the express statutory language or the case law discussed
below, which applies Section 16600 to a wide range of commercial
relationships, not just employment contracts). The Court of Appeal
chose the latter, and its willingness to adopt a unique rule for
employment contracts in the face of statutory language extending to
all contracts sacrifices reasoned statutory analysis to result-oriented
jurisprudence.
Reading Section 16600 consistently with its plain language-
which permits all contracts to the extent that they do not prevent
engagement in one's trade, business or profession-also comports
with the statute's overall framework. Even contracts that fall within
the prohibition of Section 16600 are subject to several statutory
exceptions: Section 16601, which permits the seller of a business to
agree to refrain from carrying on a similar business; Section 16602,
which enables partners to covenant not to carry on a similar business
within a specified geographic area; and Section 16602.5, which
extends a similar right to members of a limited liability company. See
Edwards, 47 Cal. Rptr. 3d at 795-96. The statute makes clear that
16
these exceptions are exclusive: "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." Cal. Bus. & Prof. Code § 16600 (emphasis added); see also
Bosley Med. Group, 161 Cal. App. 3d at 288. 4
Despite this statutory framework, and the Court of Appeal's
recognition that '''the presence of express [statutory] exceptions
ordinarily implies that additional exceptions are not contemplated,'"
Edwards, 47 Cal. Rptr. 3d at 801 (quoting People v. Standish, 38 Cal.
4th 858, 870 (2006)), the court abandoned this principle. Because it
adopted a broad, absolutist construction of Section 16600, in order to
account for the contrary case law, the court was compelled to
recognize judicially-created "exceptions" to Section 16600,
4
What the statute outlaws is a contract in which: "anyone is
restrainedfrom engaging in a lawful profession . ..." "Restrained
from" means "prevented from"; it means "precluded from"; it means
"excluded from." The Legislature made clear that it meant a
preclusion. If the Legislature had meant to outlaw the broader
category of limits on engaging in a profession, not only a preclusion
from engaging, it could have adopted any number of word choices
stating that limits on engaging in a profession were meant to be
forbidden. But it did not do that. The statute covers post-employment
covenants that prohibit engaging in a profession (temporary as well as
permanent) not limits on engaging in a profession (left to common
law development).
17
penuitting non-competition agreements when necessary to protect the
employer's trade secrets or when tailored to preclude solicitation of
customers or raiding of employees. See Edwards, 47 Cal. Rptr. 3d at
801.
Not only does the Court of Appeal's implied judicial exception
approach ignore the statutory structure of express legislative
exceptions, and thereby violate fundamental principles of statutory
construction, but its approach is unnecessary when the statute is
properly interpreted. Contractual provisions protecting an employer's
trade secrets or precluding poaching of customers or employees do not
prevent an employee from engaging in a lawful profession, trade or
business-and, therefore, Section 16600 simply does not apply in
such circumstances. Statutory or judicial "exceptions" are not needed
to cover circumstances to which the statute does not apply in the fIrst
instance.
b. The case law confirms Section 16600's plain

meaning that non-competition agreements are
lawful unless they preclude pursuit of a
business, trade or profession
Contrary to the Court of Appeal's complete ban on non-
competition agreements, this Court consistently has construed Section
16600 in keeping with its plain tenus to allow narrowly-tailored and
18
reasonable restrictions on competition. In Gordon v. Landau, 49 Cal.
2d 690 (1958), for instance, this Court construed a provision similar to
the Non-Compete Agreement at issue in this case, and concluded that
an agreement restraining an employee from soliciting former
customers for one year following termination of his employment is
valid, and does not violate Section 16600. Id. at 694-95. In reaching
that conclusion, the Court specifically held that "[t]he contract did not
restrain defendant from engaging in a lawful profession, trade or
business within the meaning ofsection 16600 ofthe Business and
Professions Code." Id. at 694 (emphasis added).
By comparison, in Chamberlain v. Augustine, 172 Cal. 285
(1916), this Court held that an agreement that imposed a substantial
penalty upon the seller of his shares in a business ifhe should engage
in that business within California, Oregon, or Washington was invalid
under Civil Code Section 1673, the predecessor to Section 16600. Id.
at 286-88. The Court determined that the agreement effectively
prohibited the seller from engaging in a lawful business, and therefore
was void. Id. at 288. Because the agreement barred the seller
completely from engaging in his lawful business operating a foundry
within the specified geographic area, the agreement's defined
19
geographic scope and preservation of a different occupation to the
seller did not render it valid. Id. at 288.
Numerous intermediate appellate court decisions also recognize
that Section 16600 does not invalidate all employee non-competition
agreements. These include two particularly influential opinions, King
v. Gerold, 109 Cal. App. 2d 316 (1952), and Boughton v. Socony
Mobil Oil Co., 231 Cal. App. 2d 188 (1964).
In King v. Gerold, the court rejected a manufacturer's
contention that an agreement violated Section 16600. Because the
agreement did not prohibit the manufacturer "from carrying on his
lawful business of manufacturing trailers but ... barred [him] merely
from manufacturing and selling trailers of the particular design and
style invented by respondent," it did not entirely prohibit the
manufacturer from engaging in his trade or business, and hence did
not violate the statute. 109 Cal. App. 2d at 318.
In Boughton, the court rejected plaintiffs' contention that a
restriction upon the use of a parcel of land as a service station violated
Section 16600, concluding that "under this restriction the [plaintiffs]
are not prevented from dispensing petroleum products and operating a
service station at any time at any other place and there directly
20
competing with defendant." 231 Cal. App. 2d at 190-91. The
restriction did not even fall within the scope of Section 16600 because
it did not bar the plaintiffs' ability to carry on their profession,
business or trade:
While the cases are uniform in refusing to enforce a

contract wherein one is restrained from pursuing an
entire business, trade, or profession, as falling within the
ambit of section 16600, where one is barredfrom
pursuing only a small or limited part ofa business,
trade or profession, the contract has been upheld as
valid.
Id. at 192 (emphasis added) (internal citations omitted); see also id. at
193 ("A contract restraining one from following a lawful trade or
calling at all is invalid because it discourages trade and commerce,
and prevents the party from earning a living, but the right to agree to
refrain from a calling within reasonable limits as to space, may have
contrary effect.") (emphasis added) (quoting Brown v. Kling, 101 Cal.
295,299 (1894)).
Contrary to the Court of Appeal's assessment, Edwards, 47 Cal.
Rptr. 3d at 800-801, Boughton is no less persuasive merely because
the restriction involved plaintiffs' use of land. The form in which an
agreement not to compete is crafted is irrelevant. Chamberlain, 172
Cal. at 288. Nor does Boughton's reasoning conflict with this Court's
21
opinion in Chamberlain, as the Court of Appeal concluded. Id. at
801. Rather, as discussed, Chamberlain entailed a complete
restriction on the seller's ability to engage in the foundry business,
and thus was invalid pursuant to former Civil Code Section 1673.
That the agreement permitted the seller to engage in a different
occupation, including employment as a laborer in the foundry
business, did not vitiate the agreement's total restriction upon the
seller's ability to engage in the business of operating, owning, or
managing a foundry. See Chamberlain, 172 Cal. at 288.
Section 16600' s limited scope was also explained in Loral
Corp. v. Moyes:
[R]easonably limited restrictions which tend more to

promote than restrain trade and business do not violate
the statute. Section 16600 does not invalidate an
employee's agreement not to disclose his former
employer's confidential customer lists or other trade
secrets or not to solicit those customers. Thus, the
statute invalidates an agreement penalizing a former
employee for obtaining employment with a competitor,
but does not necessarily affect an agreement delimiting
how he can compete.
174 Cal. App. 3d 268,276 (1985) (citations omitted; emphasis added).
Thus, Section 16600 simply is not the absolute prohibition on non-
competition agreements found by the Court of Appeal. See also Jones
v. Humanscale Corp., 130 Cal. App. 4th 401,411 (2005) ("[A] former
22
employee's right to pursue his or her lawful occupation is not without
limitation."); see also John F. Matull & Assocs., Inc. v. Cloutier, 194
Cal. App. 3d 1049, 1054 (1987) (same).
The courts' interpretation of Section 16600 comports with the
statute's public policy impetus: To protect employees' ability to
pursue their profession or calling. Adv. Bionics Corp. v. Medtronic,
Inc., 29 Cal. 4th 697, 706-07 (2002); see also Morlife, Inc. v. Perry,
56 Cal. App. 4th 1514, 1520 (1997); Metro Traffic Control, Inc. v.
Shadow Traffic Network, 22 Cal. App. 4th 853, 859 (1994) (Section
16600 ensures "that every citizen shall retain the right to pursue any
lawful employment and enterprise of their choice").
The countervailing public policy, protecting employers'
legitimate interests in protecting their client relationships and human
capital, also warrants protection. See Gordon v. Landau, 49 Cal. 2d at
694 ("Plaintiffs' preferred customers are a real asset to their business
and the foundation upon which its success, and indeed its survival,
rests"). This Court's discussion in the analogous attorney context
recognizes employers' compelling interests in protecting client
relationships, as did the Legislature with its broad exception in
Section 16602. See Howard v. Babcock, 6 Cal. 4th 409,420 (1993)
23
(non-competition agreements "address important business interests"
including firms' and businesses' "interest in the continued patronage
of its clientele"; "[t]he firm's capital finances the development of a
clientele and the support services and training necessary to
satisfactorily represent the clientele.") (citing Stephen E. Kalish,
Covenants Not to Compete and the Legal Profession, 29 St. Louis U.
L.J. 423, 438 (1985)).5
Recognizing the legitimacy of such interests, the courts thus
have upheld restrictions upon an individual's solicitation of his former
employer's clients or customers, or "raiding" his former employer's
ranks by soliciting away other employees. See, e.g., Loral Corp., 174
Cal. App. 3d at 276; Golden State Linen Serv., Inc. v. Vidalin, 69 Cal.
App. 3d 1, 9 (1977) (non-competition agreement enforceable under
Section 16600 "insofar as it provides that the affected employee will
not solicit [the employers'] customers after leaving its employ,,).6
5
As this Court noted in Howard v. Babcock, the protection
afforded businesses by Section 16602 is so extensive that virtually
absolute restrictions on competition are permitted in the context of a
transfer of partnership interests. See 6 Cal. 4th at 416 (noting that
Section 16602 has justified enforcing broad covenants not to compete
among partners).
6 The Court of Appeal essentially ignored these cases, observing
only that because Edwards did not challenge the non-solicitation
24
The courts also enforce restrictions protecting an employer's
trade secrets. See, e.g., D'Sa v. Playhut, Inc., 85 Cal. App. 4th 927,
935 (2000) ("[A] covenant not to compete will not be viewed as a
violation of section 16600 if it is necessary to protect the employer's
trade secrets ...") (internal quotation omitted); Metro Traffic Control,
Inc., 22 Cal. App. 4th at 859.
In sum, 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-are not within the scope of Section 16600. When
viewed thusly, unauthorized judicially-created "exceptions" are
unnecessary, and the statutory exceptions govern, as intended. 7
provisions of the Agreement, it was not necessary to consider the

issue. Edwards, 47 Cal. Rptr. 3d at 797, nA.
7 As numerous commentators have observed, this approach best
balances the competing concerns of employees' interests in continued
opportunities for employment, with the substantial policy concerns of
businesses to protect their investment in human capital, customer
relationships and proprietary information. See, e.g., Norman D.
Bishara, Covenants Not to Compete in a Knowledge Economy:
Balancing Innovation from Employee Mobility Against Legal
Protection for Human Capital Investment, 27 Berkeley J. Emp. &
Lab. L. 287, 314-21 (2006) (arguing that in a knowledge-based
employment society, public policy supports narrowly construed
25
While a handful of decisions broadly construe Section 16600,
see Pet. for Review at 24-25, those cases do not support an absolute
prohibition on non-competition agreements. For example, Muggill v.
noncompete agreements allowing employers to protect valuable

proprietary information, particularly in professional services arena);
see also id. at 296 (noting that states' regulation of non-competition
agreements is highly relevant to businesses' success "because the
value of many oftoday's companies, particularly high-tech companies
and other knowledge-based industries, is tied up in the creative
services provided by the human capital of their employees, not by
physical assets that can be owned, sold, or leveraged"); Michael J.
Garrison, Limiting the Protection for Employees from Compelled
Noncompete Agreements Under State Whistleblower Laws: A Critical
Analysis afMaw v. Advanced Clinical Communications, 20 Lab. Law
257, 259 (2005) ("Businesses have a legitimate interest in preventing
unfair competition by former employees who may seek to improperly
use proprietary business information or unfairly take advantage of
customer loyalties."); Note, Where Have You Gone, Law and
Economics Judges? Economic Analysis Advice to Courts, etc., 66
Ohio St. L.J. 1105,1106,1128-30,1152 (2005) (arguing against
blanket rules and discussing the rising importance and use of
covenants not to compete to protect human capital and customer
relationships); William G. Porter II & Michael C. Griffaton, Using
Noncompete Agreements to Protect Legitimate Business Interests, 69
Def. Couns. J. 194,195-96 (2002) (because all companies have
confidential and proprietary information that inevitably falls outside
the parameters of the "trade secret" definition, "[n]oncompete and
confidentiality agreements may protect not only trade secrets but also
privileged, proprietary, and confidential information that would not
qualify as a trade secret," such as customer relationships, loss of key
employees, and proprietary business knowledge); Eric A. Posner &
George G. Triantis, Covenants Not to Compete From an Incomplete
Contracts Perspective, (John M. Olin Working Paper Series, No. 137,
2D Series, 2001), available at http://www.law.uchicago.edu/
Lawecon/index.html (last visited Jan. 19,2007) (arguing that
noncompete agreements can be economically efficient).
26
Reuben H. Donnelley Corp., 62 Cal. 2d 239,242-43 (1965), held that
an agreement precluding an employee's future employment by a
competitor was an absolute prohibition on his pursuit of a profession,
trade or business and therefore within Section 16600. 8 Gordon
Termite Control v. Terrones, 84 Cal. App. 3d 176, 178 (1978),
unquestioningly followed Muggill, without discussing Gordon

,
v.
Landau, to invalidate an agreement, unlimited as to time, prohibiting a
salesman from calling on his former accounts. Thompson v. Impaxx,
Inc., 113 Cal. App. 4th 1425 (2003), invalidated an agreement
prohibiting solicitation of former customers by improperly reading
Gordon v. Landau solely as a trade secret case, which it is not, and by
minimizing Loral's ruling that agreements not to solicit former
customers were valid. Id. at 1429-30. These cases are irreconcilable
with the wealth of well-reasoned, contrary authority, and they do not
meaningfully analyze the statutory language discussed above, or the
Ninth Circuit precedent and legislative history discussed below.
8
By comparison, the Andersen Non-Compete Agreement
imposed no penalty whatsoever for obtaining employment with a
competitor. See App. 1275. See also Int 'I Bus. Mach. Corp. v.
Bajorek, 191 F.3d 1033, 1041 (9th Cir. 1999) (distinguishing Muggill
as inapplicable when agreement contains only limited restraints).
27
c. The Ninth Circuit's "narrow restraint"
doctrine correctly interprets Section 16600
Contrary to the Court of Appeal's erroneous conclusion,
Edwards, 47 Cal. Rptr. 3d at 803, the Ninth Circuit's interpretation,
which views Section 16600 as inapplicable to employment
agreements that are "narrow restraints" on trade, is not "a
misapplication of California law," but accurately reflects the scope of
Section 16600. Tellingly, as with the California case law discussed
above, the Ninth Circuit's reading has stood for many years without
prompting any suggestion from the Legislature that this interpretation
IS erroneous.
The Ninth Circuit's reading rests on this Court's decision in
Gordon v. Landau, as well as the court of appeal decisions in
Boughton v. Socony Mobil Oil Co. and King v. Gerold. Following the
California courts' lead, the Ninth Circuit has invalidated covenants
not to compete only to the extent they prohibit an employee from
engaging in his or her line of work:
Section 16600 only makes illegal those restraints which

preclude one from engaging in a lawful profession,
trade, or business.
Campbell, 817 F.2d at 502 (emphasis added).
28
The courts of the Ninth Circuit consistently have applied this
rule, holding in multiple cases that Section 16600 has no application
to non-competition agreements unless the agreement in question
precludes a party from pursuing his or her trade or business. See Int 'l
Bus. Mach. Corp., 191 F.3d at 1040 (limited restriction precluding
employee from working for competitor in order to retain stock options
was a valid restraint outside the scope of Section 16600); Gen.
Commercial Packaging, Inc. v. TPS Package Eng'g, Inc., 126 F.3d
1131, 1133 (9th Cir. 1997); accord Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Chung, 2001 WL 283083 at *6 (C.D. Cal. 2001)
(enjoining former employees from soliciting and accepting business
from Merrill Lynch clients whose accounts they serviced, following
Boughton); Baskin-Robbins Inc. v. Patel, 264 F. Supp. 2d 607,610
(N.D. Ill. 2003) (construing California law) (Boughton would permit
limited restrictions that do not preclude employee from "entire"
business or profession as contemplated by Section 16600).
In General Commercial Packaging, Inc. v. TPS Package
Engineering, Inc., for instance, the plaintiff subcontracted with
defendant TPS Package Engineering to package materials for
transport to plaintiffs customer, Disney. 126 F.3d at 1132. TPS
29
signed a contract agreeing not to solicit or deal directly with Disney
"or any other company which [General Commercial] has introduced
to and contracted with TPS to perform ... subcontracting services,"
during the term of the contract and for one year after its termination.
Id. at 1132. Applying California law, the Ninth Circuit held the
contract, which only narrowly restricted TPS's access to the
packaging and shipping market, was valid: "[S]ection 16600 does not
impair General Commercial's contract with TPS unless it entirely
precludes TPS from pursuing its trade or business." Id. at 1133.
In contrast, agreements that effectively prevent or preclude an
employee from engaging in his or her line of work or business are
within the scope of Section 16600 and therefore prohibited, unless
excepted by statute. See, e.g., Latona v. Aetna Us. Healthcare Inc.,
82 F. Supp. 2d 1089, 1094-96 (C.D. Cal. 1999) (restrictions that
prohibited employment by any competitor indefinitely and from
contacting approximately 15,000 physicians effectively prohibited
them from practicing their profession).
30
d. The legislative history of Section 16600
confirms the intent to bar only prohibitions on
engaging in a business, trade or profession
At common law, non-competition agreements, including
restraints on the practice of a profession, were valid if reasonable. See
Wright v. Ryder, 36 Cal. 342, 358 (1868) ("[A]n agreement in partial
restraint of trade, restricting it within certain reasonable limits or
times, or confining it to particular persons, would, if founded upon a
good and valuable consideration, be valid."); see also Hill Med. Corp.
v. Wycoff, 86 Cal. App. 4th 895, 900-901 (2001); Vacca Indus., Inc. v.
Van Den Berg, 5 Cal. App. 4th 34, 47-48 (1992). In 1872, upon the
enactment of the Civil Code, including Section 1673, California
supplemented this common law "rule of reasonableness" with a
statutorily-defined standard. 9
The rule of reason generally remains the law on non-
competition agreements (as discussed below); however, California
courts disagree as to whether the reasonableness standard retains
9
Civil Code Section 1673, the predecessor to Business &
Professions Code Section 16600, provided:
Every contract by which anyone is restrained from
exercising a lawful profession, trade, or business of any
kind, otherwise than is provided by the next two sections,
is to that extent void.
Cal. Civ. Code § 1673 (1872).
31
vitality after the enactment of the Civil Code. Compare Hill Med.
Corp., 86 Cal. App. 4th at 901 ("California codified its public policy
and rejected the common law 'rule of reasonableness' in 1872, upon
the enactment of the Civil Code."); and Bosley Med. Group, 161 Cal.
App. 3d at 288 ("Although at common law and in many states, a
restraint on the practice of a trade or occupation, even as applied to a
former employee, is valid if reasonable, the so-called rule of
reasonableness was rejected by this state in 1872 (internal citations
omitted); with Vacco Indus., 5 Cal. App. 4th at 47 (Section 16600 is a
"codification[] of the common law and [is] to be construed and
interpreted reasonably in light of the common law decisions on the
same subject."); South Bay Radiology Med. Assocs. v. Asher, 220 Cal.
App. 3d 1074, 1080 (1990) ("Section 16600 embodies the common
law prohibition against restraints on trade."). Accord Centeno v.
Roseville Cmty. Hosp., 107 Cal. App. 3d 62, 69 (1979) ("Where, as
here, there is no express intent to depart from, alter, or abrogate the
common law rules, a statute purporting to embody such doctrine or
rules will be construed in light of common law decisions on the same
subject."); Saala v. McFarland, 63 Cal. 2d 124, 130 (1965) ("Statutes
32
are not presumed to alter the common law otherwise than the act
expressly provides.").
This Court has recognized the ongoing relevance of the
common law, at least as concerns the scope of related Section 16602.
See Howard, 6 Cal. 4th at 416 ("We have held that the common law
'rule of reason' should apply to evaluate the noncompetition
agreement under Business and Professions Code section 16602.");
Swenson v. File, 3 Cal. 3d 389,396 (1970) ("We may assume that in
enacting former section 16602 the Legislature intended to embody the
common law concept of reasonableness.") (internal citation
omitted). 10
Regardless of the difference of opinion, the history of this
enactment reveals that the Legislature did not intend to prohibit all
non-competition agreements, particularly "reasonable" ones
previously upheld at common law, but at most intended to curtail the
10
Indeed, it seems unlikely that the California Legislature
intended to change common law on covenants not to compete because
its enactment of Civil Code Section 1673 was merely part of a large
undertaking to codify existing California law into four different codes,
including civil, civil procedure, criminal and political codes. Section
1673 was included as one of hundreds of sections in Senate Bill 430,
"An Act to Establish a Civil Code," adopted in 1872. Section 16600,
passed in 1941, as Senate Bill 360, Ch. 526, is virtually identical to
Section 1673.
33
use of unreasonable restraints on trade barring an individual from
engaging in his trade or business. Citing Dunlop v. Gregory, 10 N.Y.
241 (1851), and California Steam Navigation Co. v. Wright, 6 Cal.
258 (1856), the Code Commissioner's notes reflect the Legislature's
concern that a New York court had validated an agreement entirely
precluding the operation of a business on a portion of the Hudson
River without consideration to "avoid competition," and a California
court, although mandating that consideration be paid, had permitted
an agreement that prohibited an individual from exercising a lawful
trade over an entire line of travel. See Cal. Civ. Code § 1673 (1872),
Commissioner's Note.
In response to this concern, the Legislature expressly provided
that agreements effectively barring an individual from exercising a
lawful trade are per se unreasonable and thus prohibited. See Cal.
Civ. Code § 1673 (1872). Critically, however, confirming that the
Legislature intended to maintain the fundamental common law
permitting reasonable restraints, and narrowly-tailored covenants not
to compete, the Code Commissioner wrote: "By the terms of this
section ... , the restraint to be imposed would seem to be obliged to
be limited to a specified county; and to this effect, also, are the cases
34
of Wright v. Ryder, 36 Cal., p. 342, and Moore vs. Bonnet, 40 Cal., p.
251." Id. (emphasis added). Thus, the Code Commissioner's
annotated comments specifically approve and adopt certain common
law decisions, which recognize reasonable restraints, and which form
the basis for the rule codified. 11
The legislative history thus confirms that each side of the
debate is correct: In enacting Section 1673, the Legislature did
supplant the common law, to the extent that it had authorized
unreasonable restraints of trade precluding a party from pursuing his
vocation. As important here, however, the Legislature also expressly
maintained the common law in that narrowly-tailored and reasonable
covenants not to compete remain valid.
11
As noted above, Wright v. Ryder, 36 Cal. 342, 358 (1868), held
that "an agreement in partial restraint of trade, restricting it within
certain reasonable limits or times, or confining it to particular persons,
would, if founded upon a good and valuable consideration, be valid."
Moore v. Bonnet, 40 Cal. 251, 254 (1870), held that a covenant
precluding the exercise of a business throughout the entire state is
void, and could not be saved by construing it as limited only to San
Francisco since it was not a severable agreement; accordingly, it
failed as an unreasonable restriction. See also Brown v. Kling, 101
Cal. 295, 299 (1894) (upholding covenant not to compete limited to a
radius within five miles of the city for three years; "At common law
such a contract would have been valid.") (quoted with approval in
Boughton, 231 Cal. App. 2d at 193).
35
e. Out-of-state authority supports tailored
competitive restraints protecting customer
relationships
Finally, authority from other jurisdictions calls into question the
Court of Appeal's analysis. The court's absolute prohibition on
employee non-competition agreements is almost unprecedented.
Rather, consistent with the desire to balance legitimate business
interests (such as preserving client relationships and human capital)
with employee mobility, the overwhelming majority of states permit
reasonable restrictions on post-employment activities by former
employees. See generally 54A Am. Jur. 2d, Monopolies, § 888
(2006) ("In the majority ofjurisdictions, postemployment covenants
not to compete, being in partial restraint of trade ... are usually
enforceable if they are reasonably necessary to protect an employer's
legitimate business interests, without imposing undue hardship on the
employee ...."); R. P. Davis, Annotation, Validity and enforceability
of restrictive covenants in contracts of employment, 98 A.L.R. 963
(1935) (collecting cases); 17A C.J.S. Contracts, § 249 (2006) ("As a
general rule, an agreement in unreasonable restraint of trade is illegal
and void, but an agreement in reasonable restraint of trade is valid.").
36
In fact, three of the four states that employ nearly identical
statutory language to Section 16600-Alabama, Montana and
Oklahoma-all permit employee non-competition agreements which
do not preclude the employee from engaging in his or her trade or
profession. The courts of each of these states have interpreted their
respective statutory provisions 12 to prohibit only agreements that
entirely preclude individuals from exercising their vocation, thus
leaving other non-competition agreements beyond the scope of any
statutory prohibition. See Ex parte Howell Eng 'g & Surveying, Inc.,
2006 Ala. LEXIS 346 (Ala. Dec. 15, 2006); Dobbins, DeGuire &
Tucker, Pc. v. Rutherford, MacDonald & Olsen, 708 P.2d 577,579
(Mont. 1985). Accord Mont. Mountain Prods. v. Curl, 112 P.3d 979,
982 (Mont. 2005) (covenant not to compete prohibiting plaintiff from
practicing her trade was an unlawful restraint); Cardiovascular
Surgical Specialists, Corp. v. Mammana, 61 P.3d 210,214-15 (Okla.
2002) (non-compete agreement prohibiting former employee from
practicing cardiovascular or thoracic surgery within a radius of 20
12
See Ala. Code. § 8-1-1 (2006); Mont. Code Ann. § 28-2-703
(2006); Okla. Stat. tit. 15, § 217 (2006).
37
miles for two years was unreasonable restraint because doctor-
employee was effectively barred from his profession). 13
More to the point, non-California cases evaluating post-
employment restrictions applicable specifically to accounting
professionals have upheld narrowly-tailored restrictions. akin to those
at issue here, in recognition that professional service relationships
warrant particular solicitude for the former employer's interests.
Dobbins, 708 P.2d at 579; see also BDO Seidman v. Hirshberg, 712
N.E.2d 1220, 1225-26 (N.Y. 1999) (restrictive covenant valid to the
extent it could be construed only to prohibit accountant from retaining
clients of the firm whom he had serviced); Thompson, Breeding,
Dunn, Creswell & Sparks v. Bowlin, 765 S.W. 2d 743, 746 (Tenn.
App. 1987) (covenant by which accountant agreed not to work for any
13
Michigan's similar statute, Mich. Compo Laws Ann. § 445.761,
also permits covenants not to compete that do not preclude a former
employee from pursuing his vocation. See, e.g., Merrill Lynch,
Pierce, Fenner & Smith Inc. v. Ran, 67 F. Supp. 2d 764 (E.D. Mich.
1999) (agreement by broker not to solicit brokerage firm's clients for
one year after termination enforceable because it did not preclude him
from pursuing his vocation). Research suggests that North Dakota is
the only state with similar statutory language to adopt a sweeping
prohibition on non-competition agreements comparable to that
announced by the Court of Appeal in this case. See Warner & CO. V.
Solberg, 634 N.W.2d 65, 71-72 (N.D. 2001); Werlinger v. Mut. Servo
Cas. Ins. Co., 496 N.W.2d 26,28-29,30 (N.D. 1993).
38
of employer's clients for three years was enforceable); Perry v.
Moran, 748 P.2d 224,230-31 (Wash. 1987), modified on other grds.,
766 P.2d 1096 (Wash. 1989) (covenant enforceable where accounting
firm had legitimate interest in protecting client base from depletion by
former employee).
These cases recognize that, particularly in professions such as
accounting, where personal service relationships form the core of the
business, employee poaching of clients can be an unfair business
practice. BDO Seidman, 712 N.B. 2d at 1225 (discussing employer's
legitimate interest in protecting against former employee's
competitive use of client relationships which employer had enabled
him to acquire); Perry, 748 P.2d at 229 (employer "has a legitimate
interest in protecting its existing client base from depletion by a
former employee" and "a justifiable expectation that if it provided
employment to an accountant, that employee would not take its
customers."); Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill. App.
3d 146, 153 (2001) (non-competition agreement protected employer's
"legitimate interest in protecting its long-standing client relationships
without interference from its former employees"); Wolf & Co. v.
Waldron, 366 N.E. 2d 603, 606 (Ill. App. 1977) ("The protection of
39
this asset [the employer's clientele] is recognized as a legitimate
interest of an employer.").
In sum, should this Court look for guidance to the law of other
states, including those with similar statutory schemes and those
evaluating constraints on accounting professionals, that law confirms
that narrow restraints like those at issue here are lawful.
2. The Court Of Appeal Erred In Concluding That The

Non-Compete Agreement Was Unlawful
As shown, Section 16600 does not prohibit all non-competition
agreements. Instead, whether such an agreement falls within the
scope of Section 16600 in the first instance requires an examination of
the particular restriction imposed. Here, neither of the limited
restrictions placed upon Edwards implicates Section 16600. 14
14
Contrary to Edwards's assertion in the Court of Appeal, AOB at
51, the validity of the Non-Compete Agreement is a question oflaw,
subject to resolution via summary adjudication or, as here, by bench
trial with the court ruling as a matter oflaw. See, e.g., Latona, 82 F.
Supp. 2d at 1093. Moreover, to the extent that certain facts must be
known to evaluate the validity of the Agreement, such facts are
disclosed by the record and are not in dispute. See RT 177:10-12.
40
a. The first restriction in the Agreement was
lawful
The first restriction Edwards challenges read:
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.
App. 1275 (emphasis added).
This provision restricted Edwards from performing tax
accounting services for particular clients (those he serviced during
the 18 months before leaving Andersen) for a defined period of time
(18 months after leaving). The total impact of this provision on
Edwards's continued practice of his profession was limited and
undisputed: Edwards serviced only approximately 14 clients
consisting of approximately 35 matters in 2002; during 2001 and
2002, he worked on an estimated 50 matters. See App. 665, 899. The
Agreement prohibited Edwards only from servicing these few clients
for a limited time.
Moreover, the Agreement permitted Edwards to practice in his
profession (accounting), in his area of specialty (tax accounting), and
even in his area of subspecialty (tax accounting for high net worth
41
individuals). Merely restricting Edwards temporarily from servicing a
tiny group of former Andersen clients did not prevent or preclude him
from engaging in his profession. As Edwards admitted in his
deposition, "there is enough business" in Los Angeles of the type he
performed "to go around all the different C.P.A. firms." See id. at
620-21. 15 Indeed, the trial court confirmed the breadth of this market,
finding it "a pretty significant fact," RT 177: 14-20, and concluding
that as a result, "there wasn't any significant restriction on
[Edwards's] ability to work. There wasn't even perhaps any minimal
restriction on his ability to work." RT 176:7-9 (emphasis added).
Finally, the Agreement permitted Edwards to seek and/or obtain
employment with any Andersen client or former client immediately
upon leaving Andersen, without penalty.
Such a narrow restriction, which indisputably left the vast
majority of the market available to Edwards simply does not implicate
Section 16600. See Loral Corp., 174 Cal. App. 3d at 279. Indeed,
this restriction is far less burdensome than the agreement upheld in
Loral, which prohibited an employee entirely from disrupting the
15
After leaving Andersen, Edwards went to work for BDO
Seidman, then the fifth largest accounting firm in the country. App.
1266,2025.
42
employer's business or its relationship with customers. Loral, 174
Cal. App. 3d at 274.
The Court of Appeal's contrary conclusion rested on its
misconstruction of the scope of Section 16600, as well as its
misapplication of the very authority upon which it relied. In Morris v.
Harris, 127 Cal. App. 2d 476 (1954), which the Court of Appeal read
to invalidate a purportedly "similar" non-competition covenant, the
restriction at issue effectively prohibited a party to an employment
agreement (styled as a "lease") from soliciting or accepting business
from any of the clients of the employer for a ten-year period. Id. at
477. This broad restrictive covenant barred the employee even from
accepting employment from his former employer's customers
"without solicitation on his part." Accordingly, as this Court held in
Chamberlain, merely limiting the prohibition to a ten year period-a
"partial restraint of trade"-eould not validate an otherwise invalid
agreement. Id. at 476.
Here, by contrast, the Agreement limited Edwards's access only
to an extremely narrow segment of the tax accounting services market
for a brief duration. This restriction did not prohibit Edwards from
continuing to engage in his chosen profession, and as a result could
43
not fall within the scope of Section 16600. See Gen. Commercial
Packaging, 126 F.3d at 1134; see also Int'l Bus. Mach Corp., 191
F.3d at 1041 (restriction excluding former employee "from one small
comer of the market but would not preclude him from engaging in his
profession, trade or business" outside the scope of Section 16600).
b. The second restriction in the Agreement was

lawful
Edwards also claims that Section 16600 invalidates the second
restriction, which provided:
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.
App.1275.
This restriction simply prohibited Edwards from raiding clients
of Andersen's Los Angeles office, for a limited period of time, once
he left Andersen to work for another firm. Edwards was permitted to
provide any tax accounting services to any client of that or any other
firm (except for the few clients he serviced while at Andersen), and to
solicit as new clients anyone but clients of Andersen's Los Angeles
office, and then only for one year.
44
Without question, Andersen had an investment in its client
relationships which, without violating Section 16600, Andersen was
entitled to protect with this anti-solicitation provision. See Gordon,
49 Cal. 2d at 694 (agreement prohibiting employee from soliciting
former employer's customers for one year is enforceable under
Section 16600); Loral Corp., 174 Cal. App. 3d at 276 ("Section 16600
does not invalidate an employee's agreement not to disclose his
former employer's confidential customer lists or other trade secrets or
not to solicit those customers"); Golden State Linen Serv., 69 Cal.
App. 3d at 9 (non-compete provision enforceable under Section 16600
"insofar as it provides that the affected employee will not solicit
Golden State's customers after leaving its employ").
* * *
The Court of Appeal's decision could be reached only by
judicially amending Section 16600 and ignoring a wealth of
precedent. Agreements that merely impose narrow restraints upon
post-employment conduct, but permit the pursuit of one's chosen
field, do not violate Section 16600. The Court should have affirmed
the trial court's decision, finding the narrow restrictions in the Non-
Compete valid.
45
B. Contrary To The Court Of Appeal's Decision, The TONC
Is A Lawful, Standard Form Release
As discussed above, when Andersen sold portions of its Los
Angeles tax practice to HSBC, HSBC required all former Andersen
employees, as a condition of employment with HSBC, to be released
from any restrictive covenants, including the Non-Compete
Agreements signed by managers. App. 390, 539, 686-87. To
accomplish such releases, Andersen utilized the TONC, which
included a standard release of "any and all" claims the employee
might have against Andersen, except for "claims ... for any accrued
and unpaid salary or other employee benefit or compensation owing to
Employee as of the date hereof." App.579.
In a ruling that stretched to find illegality where none exists, the
Court of Appeal held the TONC to be unlawful and an independently
wrongful act for purposes of tort liability. Remarkably, the court
found that the TONC waived Edwards's employee indemnification
rights, even though the TONC makes no reference to indemnification
rights. In the face of this silence, the court strained to create illegality
by importing into the agreement a term that was neither expressed nor
intended, which term the court found rendered the agreement
unlawful. Even more incomprehensibly, the term the court
46
imported-a waiver of employee indemnification rights-is
impermissible under Section 2802, and null and void as a matter of
law under Section 2804.
Not only does the Court of Appeal's ruling contravene Sections
2802 and 2804, and the principle that contracts incorporate all
applicable laws, which are presumed to be known by the parties, but
the court's approach flouts fundamental principles of contract
interpretation-which decline to imply terms not written, and interpret
agreements to be lawful, not unlawful. The Court of Appeal's rule
also creates absurd and unworkable results: for a standard form
release of "any and all" claims to be lawful, it must explicitly set out
and preserve unwaivable rights.
1. Under The Labor Code, The TONC Release Provision

Could Not Waive Employee Indemnification Rights
California has a strong public policy favoring employer
indemnification of employees for claims and liabilities resulting from
the employees' acts within the course and scope of their employment.
Justice Ming W. Chin, et al., California Practice Guide: Employment
Litigation ,-r 3: I (The Rutter Group 2005). Section 2802 codifies that
public policy, stating in pertinent part, "An employer shall indemnify
his or her employee for all necessary expenditures or losses incurred
47
by the employee in direct consequence of the discharge of his or her
duties...." Cal. Lab. Code § 2802. Section 2804 provides fail-safe
protection for employee indemnification rights, holding that "[a]ny
contract or agreement ... made by any employee to waive the benefits
of this article or any part thereof [including indemnification under
Section 2802], is null and void...." Cal. Lab. Code § 2804. Thus, by
law, employee indemnification rights are unwaivable, regardless of
the language used in employment contracts or other agreements.
Notwithstanding the clear statutory framework protecting
employee indemnification rights, the Court of Appeal held that the
TONC was unlawful because the standard release provision in the
agreement, waiving "any and all" claims, could be read to waive
Edwards's indemnification rights under Section 2802. Edwards, 47
Cal. Rptr. 3d at 807. Although the TONC did not reference
unwaivable indemnification rights (or any other unwaivable rights)-
let alone purport to waive such rights-the Court of Appeal read an
implied waiver into the TONC. Id. ("The provision did not expressly
reference indemnity rights, but ... [t]hey were necessarily
encompassed within the ... broad release.").
48
That approach was erroneous. An ancient and inviolate
principle of California law is that "all 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." City of Torrance v. Workers'
Camp. Appeals Bd., 32 Cal. 3d 371,378 (1982) (internal quotations
and citations omitted). Thus, Section 2802 could not have been
waived by the agreement-they formed a part of its terms.
While the Court of Appeal expressed concern about Edwards's
hypothetical ignorance of these statutes enacted for his benefit, "the
parties are presumed to know and to have had in mind" the law, and
there is no reasoned or useful basis for departing from this rule on an
ad hoc basis because of the possible lack of sophistication of one of
the contracting parties. Baker Pacific Corp. v. Suttles, 220 Cal. App.
3d 1148, 1159 (1990) (Peterson, J., dissenting). As Justice Peterson's
cogent dissent notes, implying a waiver of nonwaivable rights in
broad release language due to the potential ignorance of a contracting
party creates endless mischief:
This reasoning, I respectfully submit, posits

without precedent a strange and murky doctrine in
49
contract analysis. It means this: A release, to avoid
invalidation on public policy grounds the majority
asserts, must literally set forth and exclude from its
effects acts already so excluded by operation of law ...
if the releasor lacks the "sophistication" or "bargaining
strength" of the releasee, and arguably cannot therefore
be deemed to understand the principle of incorporation
[of law] ... , and its legal effect on, all releases in this
state.
Carried to its logical extension, such reasoning

would compel similar revision of all contracts to include
literally all relevant portions of the Civil Code of this
state, affecting that contract and now deemed
incorporated therein. The test of the parties' relative
"sophistication" as a trigger of that result would remain a
subject of repeated factual dispute in each case.
Traditional rules of contract interpretation, incorporating
applicable statutes therein as a matter of law, would be
effectively abolished. The question of whether a relevant
statute is incorporated by law in a contract of release
would become uncertain at best, unknown at worst. If
from case to case the relative "sophistication" and
business acumen of releasors and releasees varies, literal
inclusion of the relevant statute would be required at the
peril and risk of the release being found invalid. No
incorporation by law of the terms of a statute in a release
could be safely assumed by any drafting lawyer under
these circumstances; and the complexity of, and litigation
concerning, legal draftsmanship and the legal effect of
releases would thereby be sharply and unnecessarily
heightened.
50
Id. at 1163-64 (emphasis in original). The present case provides an
object lesson on the wisdom of Justice Peterson's view. 16
Indeed, the Court of Appeal here fell into precisely the trap
predicted by Justice Peterson, distinguishing releases applicable to
hypothetically "ignorant" employees from other contracts, without
support in law. The court concluded that employers are better situated
than employees to bear the burden of drafting releases that comply
with the law. Edwards, 47 Cal. Rptr. 3d at 809-10. Noticeably absent
from the Court of Appeal's opinion is a recognition that the
Legislature already provided adequate protection for employee
indemnification rights through the enactment ofLabor Code
Section 2804-making any attempted waiver of such rights null and
void. Cal. Lab. Code § 2804. Through its nullifying language,
Section 2804 provides absolute protection for employee
16
While the Court of Appeal relied upon Baker, that decision
does not control this case. As the majority opinion notes, the releasee
in Baker was seeking to uphold a broad release proscribed by statute
(Civil Code Section 1668) on the theory that a party could contract to
contravene statutory proscriptions. 220 Cal. App. 3d at 1153. Here,
Andersen had no intent to seek a waiver of Edwards's unwaivable,
indemnity rights, and is not attempting to do so through litigation.
Andersen was attempting to follow the law, which it believed was
incorporated into its agreement with Edwards under the authority
cited above. The majority opinion in Baker is inapposite.
51
indemnification rights, and puts both employers and employees on
notice of the consequences of any attempt to waive them. Given
Section 2804, the Court's policy rationale is superfluous and
unconvmcmg.
Moreover, because any purported waiver of Edwards's right to
indemnification would be ineffective as a matter of law, the TONC
could not have effected such a waiver. As noted, Section 2804
provides that "[a]ny contract or agreement ... made by any employee
to waive the benefits of this article or any part thereof [including
indemnification under Section 2802], is null and void[.]" Cal. Lab.
Code § 2804 (emphasis added). The terms "null" and "void" mean to
have "no legal effect," but they do not mean wrongful or unlawful.
See Black's Law Dictionary 1098, 1604, 1644 (8th ed. 2004)
(defining "null" and "void" as having "no legal effect," and
"wrongful" as "[c]ontrary to law; unlawful").
The Court of Appeal itself acknowledged the distinction
between a "void" act that has no legal effect and an act that is
"wrongful" and therefore punishable, but failed to come to the
obvious conclusion that tort liability should not attach to the former as
applied to the facts of this case. In rejecting Edwards's contention
52
that the TONC was an independently wrongful act because it violated
Labor Code Section 432.5,17 the Court of Appeal distinguished
Section 432.5-a penal statute-from Section 2804, which merely
renders a contract purporting to waive indemnification rights "null
and void," rather than criminally wrongful. Edwards, 47 Cal. Rptr. 3d
at 809, n.IO. However, despite adopting the legal definition of "void"
as meaning "of no legal effect," the court nevertheless held that the
"ineffective" release that it implied in the TONC constituted an
independently "wrongful" act for purposes of establishing tort
liability. In so doing, the court ignored the legislative intent behind
assigning punishment under one scenario (Section 432.5), and merely
providing protection for employee rights under another (Section
2804).
Moreover, the Court of Appeal's opinion is internally
inconsistent in that it ignores its own admonition to construe the terms
of a statute "in their statutory context." Edwards, 47 Cal. Rptr. 3d at
17 Labor Code Section 432.5 provides: ''No employer, or agent,

manager, superintendent, or officer thereof, shall require any
employee or applicant for employment to agree, in writing, to any
term or condition which is known by such employer, or agent,
manager, superintendent, or officer thereof to be prohibited by law."
Cal. Lab. Code § 432.5.
53
800. When the statute is viewed "in context," the Labor Code
specifies exactly what employer actions are unlawful or prohibited
and what punishment, if any, shall be imposed. For example, Labor
Code Section 206.5 provides:
No employer shall require the execution of any release of

any claim or right on account of wages due, or to become
due, or made as an advance on wages to be earned, unless
payment of such wages has been made. Any release
required or executed in violation of the provisions of this
section shall be null and void as between the employer
and the employee and the violation of the provisions of
this section shall be a misdemeanor.
Cal. Lab. Code § 206.5 (emphasis added). This section and numerous
other Labor Code provisions prohibit certain wrongful conduct and
impose various levels of punishment for violations, making clear that
when the Legislature meant to make an employer's conduct unlawful,
it knew exactly how to do SO.I8
By comparison, no provision ofthe Labor Code punishes or
criminalizes an employer for requiring the execution ofa release
18
See, e.g., Cal. Lab. Code § 215 ("Any person, or the agent,
manager, superintendent or officer thereof, who violates any
provision ... is guilty of a misdemeanor."); § 225.5 (b) ("For each
subsequent violation, or any willful or intentional violation, two
hundred dollars ($200) for each failure to pay each employee, plus 25
percent of the amount unlawfully withheld"); § 354 ("Any employer
who violates any provision of this article is guilty of a misdemeanor,
punishable by a fine not exceeding one thousand dollars ($1,000) or
by imprisonment for not exceeding 60 days, or both").
54
that purports to waive indemnification rights. Instead, Section 2804
simply makes such a waiver "null and void," or ineffective. There is
no Labor Code violation, and therefore no punishment, associated
with such conduct. Thus, although Andersen's commercially standard
release did not purport to waive Section 2802 indemnification rights
or any other legally unwaivable right, even if it had, requiring
execution of the release was not wrongful as a matter oflaw. As the
trial court correctly held, "[T]he Labor Code pretty much tells us that
right can't be waived. As a matter oflaw, any provision in the release
that attempts to waive it would be void. . .. [T]he TONC is not
illegal." See RT 174, 178.
2. The Court Of Appeal's Interpretation Of The TONC

Violated Fundamental Tenets Of Contract
Interpretation
a. The Court of Appeal improperly implied a
waiver of employee indemnification rights
where none existed
Under California law, the interpretation of any contract-
including an employment contract-must begin with its express
terms. Cal. Civ. Code § 1638 ("The language ofa contract is to
govern its interpretation."); Sierra Vista Reg '[ Med. etr. v. Bonta, 107
Cal. App. 4th 237,245-46 (2003) (examining words of contract as
55
first step in interpreting intentions of parties); Brandt v. Lockheed
Missiles & Space Co., 154 Cal. App. 3d 1124, 1129-30 (1984)
(looking to express terms of employment contract in interpreting
agreement). When analyzing a contract, a court's only task is to
ascertain what is contained therein, and courts are "not to insert what
has been omitted, or to omit what has been inserted." Cal. Civ. Proc.
Code § 1858.
The release provision in the TONC did not, by its terms or by
implication, purport to waive Edwards's indemnification rights, or any
other rights that are made unwaivable as a matter oflaw. This
absence of any express waiver of indemnification rights led the trial
court to find the release valid and enforceable:
On the issue of the waiver of indemnity, the release is a

typical broad release. It doesn't specifically anywhere
request that that right be waived... I don't interpret the
release to be requiring Mr. Edwards to give up his rights
as a matter of law.
RT 174.
The trial court followed the maxim set forth in Section 1858,
interpreting the instrument as written, and refraining from inserting
that which had been omitted.
56
By contrast, the Court of Appeal interpreted the release to
effectuate a legally impossible waiver. By reading in a term not there,
and holding that the TONC impliedly waived unwaivable rights-
with nothing in the release to suggest that Andersen sought to do more
than waive rights that may be waived as a matter of law, as parties
who use the same standard release language do every day-the court
ignored established rules of contract interpretation. Reading such a
waiver into the contract was error. Cal. Civ. Proc. Code § 1858.
b. The Court of Appeal improperly read the

TONC to be unlawful
Even assuming for the sake of argument that the release
provision in the TONC could rationally be interpreted as creating an
indemnification waiver, the Court of Appeal's approach ignored
another fundamental interpretive rule: The Court of Appeal was
required-as the trial court did-to interpret the contract in such a
way as to render it lawful. See, e.g., Jones v. Humanscale Corp., 130
Cal. App. 4th at 411 (when interpreting a covenant not to compete,
court "must ... construe [it] to be lawful if possible"); Loral Corp.,
174 Cal. App. 3d at 278 ("contract must be construed to be lawful if
possible").
57
It is well established that "a contract must receive such
interpretation as will make it lawful, operative, definite, reasonable,
and capable of being carried into effect." Cal. Civ. Code § 1643
(emphasis added). "[A]n interpretation which gives a reasonable,
lawful, and effective meaning to all the terms is preferred to an
interpretation which leaves a part unreasonable, unlawful or of no
effect." 1 B. E. Witkin, Summary ofCalifornia Law, Contracts § 750,
p. 840 (10th ed. 2005).
Because the express terms of the TONC did not purport to
waive unwaivable employee indemnification rights, there were at least
two possible constructions of the contract. First-and in accordance
with established rules of contract interpretation-the Court of Appeal
could have agreed with the trial court and found that the TONC did
not purport to waive Edwards's unwaivable indemnification rights.
Alternatively, the court could have interpreted, and did interpret, the
release provision to waive indemnification rights.
Courts interpreting a contract susceptible to two meanings are
required to choose the interpretation that renders the contract lawful.
Cal. Civ. Code § 1643. As this Court has said: "If a contract is
capable of two constructions courts are bound to give such an
58
interpretation as will make it lawful, operative, definite, reasonable,
and capable of being carried into effect, if that can be done without
violating the intention of the parties." Rodriguez v. Barnett, 52 Cal.
2d 154, 160 (1959) (citation omitted; emphasis added); see also Cal.
Civ. Code § 3541 (maxim of California jurisprudence that "[a]n
interpretation which gives effect is preferred to one which makes
void"); Loral Corp., 174 Cal. App. 3d at 278-79 (termination
agreement prohibiting employee from interfering with his former
employer's business must be construed to be lawful).
California decisional law is replete with examples in which
courts have invoked this interpretive rule to find contracts lawful and
enforceable. See, e.g., County ofMarin v. Assessment Appeals Bd., 64
Cal. App. 3d 319, 325, 328 (1976) (in declaratory relief action,
applying principles of Civil Code Sections 1643 and 3541 to construe
contract provisions to make them operative and lawful). See also
Byrne v. Laura, 52 Cal. App. 4th 1054,1070-71 (1997) (following
rule of construction in favor of enforcement by interpreting contract to
create a trust rather than an oral joint tenancy); Strong v. Theis, 187
Cal. App. 3d 913, 919, 920 (1986); S. Tahoe Gas Co. v. Hofmann
Land Improvement Co., 25 Cal. App. 3d 750, 757 (1972).
59
The trial court followed established rules of contract
interpretation, and found the TONC not to be illegal or unlawful. RT
178 ("And I think using the interpretation rules that I have to these
[sic], the TONC is not illegal."). Likewise, the Court of Appeal easily
could (and should) have construed the release provision in the TONC
to be valid, by assuming that the parties did not intend a release not
expressed in the language of the contract, and that Section 2804 would
have rendered void. Instead of choosing the more reasonable and
lawful construction, however, the Court of Appeal reached to render
the TONC unlawful by implying a release not expressed in the
agreement, and one that could have no legal effect. By stretching to
find an unlawful release by implication, the Court of Appeal violated
yet another basic tenet of contract interpretation.
3. The Court Of Appeal's Interpretation Of The TONC

Has Far-Reaching Adverse Consequences And Leads
To An Absurd Result
Implying a waiver of an unwaivable statutory right into "any
and all" release language has broad negative consequences. This is
form language, common to countless standard employment
agreements, commercial contracts and settlements in effect across
California. See generally Justice Ming W. Chin, et a!., California
60
Practice Guide: Employment Litigation, Form 16:A ("Settlement
Agreement and Release") (The Rutter Group 2005) (including "any
claims arising out of ... employment" within a form "General
Release,,).19 Few of these agreements state the obvious: they do not
release claims that as a matter of law cannot be released. But under
the Court of Appeal's new rule, employers absurdly will be required
to list every potentially applicable unwaivable statutory right as an
exception to a standard release of "any and all" claims. There are
myriad statutory rights which may not be waived as a matter oflaw. 20
19 Indeed, the trial court noted that the TONC contains a "typical"
release. See RT 174 (July 21,2004). See also Jefferson v. Cal. Dep't
ofYouth Authority, 28 Cal. 4th 299, 302-04 (2002) (concluding
standard language releasing "all claims" in connection with settlement
of workers compensation claim was enforceable). As a result, the
Court of Appeal's invalidation of the release language has far-
reaching impact well beyond this employment dispute.
20 Among the claims which cannot be waived are minimum wage
claims under the Fair Labor Standards Act, D.A. Schulte, Inc. v.
Gangi, 328 U.S. 108, 116 (1946), EEOC claims, E.E.O.c. v. Cosmair,
Inc. v. L 'Oreal Hair Care Div., 821 F.2d 1085, 1090 (5th Cir. 1987),
claims for wages, Cal. Lab. Code § 206.5, and countless others. See
also Littlev. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1077 (2003)
(Tameny claim unwaivable); County ofRiverside v. Superior Court,
27 Cal. 4th 793, 804-805 (2002) (listing some employee protections
that are not waivable by contract, including Labor Code Sections 219,
365,2804,2855, and Unemployment Insurance Code Section 1342, as
well as reciting numerous case law holdings as to rights which cannot
be waived). See generally Ann Taylor Schwing, 2 California
Affirmative Defenses § 47: 13 (2005 ed.), Rights and privileges that
61
Rather than promoting clarity and certainty for employees and
employers, the Court's rule will inevitably transform standard releases
into unnecessarily verbose contracts containing lengthy lists of
exceptions. 21
may not be waived (2006) (listing rights as to which legislature has

expressly provided that attempted waivers are void, including any
contract by an employee to waive the benefits of Labor Code Sections
2800, et seq. and rights under Labor Code Section 2855). By contrast,
at least as to some specific claims, a general release is sufficient to
release such claims. See Smith v. Amedisys Inc., 298 F.3d 434,443
(5th Cir. 2002) (no requirement under Title VII or federal common
law that a release specify Title VII or federal causes of action).
21 Further, it is not always readily apparent which rights are
waivable by law and which are not. For example, California Civil
Code Section 3513 states that "Anyone may waive the advantage of a
law intended solely for his benefit. But a law established for a public
reason cannot be contravened by a private agreement." Cal. Civ.
Code § 3513. However, courts have labeled a literal construction of
Section 3513 as "unreasonable," since "'it is difficult to conceive of a
statutory right enacted solely for the benefit of private individuals that
does not also have an incidental public benefit. ,,, Azteca Constr., Inc.
v. ADR Consulting, Inc., 121 Cal. App. 4th 1156, 1166 (2004); see
generally 2 Cal. Affirmative De! § 47: 13, Rights and Privileges that
May Not Be Waived (2006) ("In the absence of an express statutory
declaration forbidding waiver, whether a particular law serves a public
purpose or private purpose is not always immediately obvious"). That
some statutorily-created rights may be waived, see, e.g., County of
Riverside v. Super. Ct., 27 Cal. 4th 793, 806 (2002) (police officer
may waive rights under Public Safety Officers Procedural Bill of
Rights Act), while waiver of other rights-such as employee
indemnification rights-is presumptively void as a matter of law,
creates further confusion for employers attempting to draft a release in
line with the Court of Appeal's opinion.
62
The burden of the Court of Appeal's new rule on commerce is
extraordinary and unjustified. Every party seeking to draft a lawful
and effective release will be required to scour all potentially relevant
code provisions and other sources of public policy to ascertain a
complete list of potentially applicable unwaivable claims, which
claims must then expressly be preserved. Any agreement that does
not explicitly carve out every unwaivable right from a general release
of "any and all" claims brings with it the substantial risk of
invalidation, unlawfulness and, as in this case, potentially significant
tort liability. All of this effort is unnecessary and superfluous because
the rights to be preserved already are protected, both by the specific
statute making such claims unwaivable by law and by the general rule
that all law is incorporated into contracts.
C. Both The Non-Compete Agreement And The TONC Were

Lawful Contracts, And Therefore Cannot Form A Basis For
Tort Liability
To recover damages for the tort of interference with prospective
economic advantage, a plaintiff must prove that the defendant's
actions were "independently wrongful," meaning "proscribed by some
constitutional, statutory, regulatory, common law, or other
determinable legal standard." Korea Supply Co. v. Lockheed Martin
63
Corp., 29 Cal. 4th at 1153-54, 1159; Della Penna v. Toyota Motor
Sales, U.S.A., Inc., 11 Cal. 4th 376,393 (1995).
As the foregoing demonstrates, the Court of Appeal's holding
that Andersen committed an independently wrongful act cannot be
sustained. First, the Non-Compete Agreement was lawful and,
therefore, its use was not an independently wrongful act. The
Agreement did not run afoul of Section 16600 by preventing Edwards
from engaging in his profession, business or trade, but rather imposed
only two narrow restrictions, neither of which precluded Edwards
from continuing to practice in his chosen field. 22
Second, the TONC also was lawful because it did not and could
not waive unwaivable indemnification rights, absolutely protected by
law. As the trial court correctly held, "[T]he TONC is not illegal.
And so requiring [Edwards] to sign it would not violate public policy
or even be coercive." See RT 178.
And third, because the Non-Compete Agreement and the
TONC were both lawful, asking Edwards to sign the TONC in
22
Indeed, the trial court concluded that "there wasn't any
significant restriction on [Edwards's] ability to work. There wasn't
even perhaps any minimal restriction on his ability to work."
Edwards, 47 Cal. Rptr. 3d at 798.
64
exchange for being released from the Non-Compete Agreement could
not be an independently wrongful act. 23
Because there was no unlawful act by Andersen, the Court of
Appeal's opinion should be reversed, and the trial court's judgment in
favor of Andersen should be reinstated. 24
V. CONCLUSION
Without reason or necessity, the Court of Appeal has altered the
statutory balance of competing interests, leaving no room for the
23
The legality of the TONC differentiates D'Sa v. Playhut, Inc.,
85 Cal. App. 4th 927 (2000), erroneously relied upon by the Court of
Appeal, from this case. In D 'Sa, the agreement in question was
unlawful under Section 16600 because it prohibited the employee
from working for a competitor. Id. at 934-35. Accordingly, requiring
the employee to sign such an unlawful agreement as a condition of
employment was a violation of public policy. Id. at 931-32. Here,
while Edwards needed to sign the TONC as required by HSBC, the
TONC did not itself contain an unlawful provision (it merely released
"any and all" claims), and it cannot be rendered unlawful because it
was utilized to undo the Non-Compete Agreement, because that
Agreement merely contained narrow restraints on competition, did not
prohibit employment with a competitor, and therefore was valid under
Section 16600, as discussed.
24 Even if this Court were to conclude that the Non-Compete
Agreement and/or the TONC were unlawful, thereby establishing the
"wrongful act" element of Edwards's interference claim, as the court
below recognized, Edwards would not necessarily be entitled to
judgment. The Court of Appeal's opinion and determination dealt
only with the third element of the tort. If the opinion below were
affirmed in either respect, then factual issues would remain for trial.
See Edwards, 47 Cal. Rptr. at 795, 804 n.7.
65
legitimate interests of employers in preserving their client
relationships and human capital.
First, with its blanket prohibition on employee non-competition
agreements, the Court altered Section 16600: That section does not
bar all post-employment restrictions; it does not distinguish
employment relationships from other contracts; and it does not
contemplate the judicially-created exceptions that are a necessary
consequence of the Court of Appeal's absolute rule.
Contrary to the Court of Appeal's reading, not just the statute,
but a long line of precedent permits non-competition agreements that
do not preclude an employee from engaging in his trade or business-
agreements which are outside Section l6600's prohibitions. lfthe
statute is now to be rewritten, it should be for the Legislature to decide
that employers' interests in protecting their hard-won business
allegiances and relationships are to be afforded no contractual
protection.
Equally troubling is the Court of Appeal's conclusion that an
agreement such as the TONC, which is silent on employee
indemnification rights, will be read to waive those rights, even when
such a waiver would be void by statute. With this tortured reasoning,
66
the decision below finds an employer has committed an unlawful act
by entering into an agreement that does not contain the offending
term, and worse, when by law, it could not contain such a term. The
decision thereby turns standard "any and all" release language into a
senseless snare for liability, placing at risk not just employers, but any
contracting party using this form release.
To maintain balance, fairness and rationality in employer-
employee and other contractual relationships, Andersen respectfully
requests that this Court reverse the Court of Appeal's decision and
reinstate the judgment of the trial court.
DATED: January 26, 2007
67
CERTIFICATE OF WORD COUNT
Pursuant to the California Rules of Court, Rule 28.1,
subdivision (d)( 1), the text of this petition consists of 13,996 words as
counted by the Microsoft Office Word 2003 word-processing program
used to generate the petition.
DATED: January 26, 2007
68
PROOF OF SERVICE
I am employed in the County of Los Angeles, State of California. I am over

the age of 18 years and not a party to this action. My business address is Latham
& Watkins LLP, 633 West Fifth Street, Suite 4000, Los Angeles, CA 90071-2007.
On January 26, 2007, I served the following document(s) described as:
OPENING BRIEF ON THE MERITS
by serving a true copy of the above-described document in the following manner:
I am familiar with the office practice of Latham & Watkins for collecting
and processing documents for mailing with the United States Postal Service.
Under that practice, documents are deposited with the Latham & Watkins
personnel responsible for depositing documents with the United States Postal
Service; such documents are delivered to the United States Postal Service on that
same day in the ordinary course of business, with postage thereon fully prepaid. I
deposited in Latham & Watkins' interoffice mail a sealed envelope or package
containing the above-described document and addressed as set forth below in
accordance with the office practice of Latham & Watkins for collecting and
processing documents for mailing with the United States Postal Service:
Richard A. Love, Esq. Marc J. Poster, Esq.

Beth A. Shenfeld, Esq. Greines, Martin, Stein & Richland LLP
Law Offices of Richard A. Love 5700 Wilshire Blvd., Suite 375
11601 Wilshire Blvd., Suite 2000 Los Angeles, CA 90036-3626
Los Angeles, CA 90025 Attorneys for Plaintiff and Appellant
Attorneys for Plaintiff and Appellant Raymond Edwards II
Raymond Edwards II
Paul Grossman, Esq. Erika C. Frank, Esq.

California Employment Law Council General Counsel
Employers Group California Chamber of Commerce
515 S. Flower Street, 25 th Floor 1215 K Street, Suite 1400
Los Angeles, CA 90071 Sacramento, CA 95812-1736
Amicus Curiae Attorneys Amicus Curiae Attorneys
Jeffrey A. Berman, Esq. Scott H. Dunham, Esq.

Sidley Austin LLP Christopher W. Decker, Esq.
555 W. Fifth Street, Suite 4000 O'Melveny & Myers LLP
Los Angeles, CA 90013-1010 400 S. Hope Street
Amicus Curiae Attorneys Los Angeles, CA 90071-2899
Amicus Curiae Attorneys
LA\1629959.!
Clerk of the Court Clerk of the Court
California Court of Appeal Superior Court of Los Angeles
Second District, Division Three 111 N. Hill Street
Ronald Reagan State Building Los Angeles, CA 90012
300 South Spring Street,
Second Floor
Los Angeles, CA 90013
I declare that I am employed in the office of a member of the Bar of,

or permitted to practice before, this Court at whose direction the service was made
and declare under penalty of perjury under the laws of the State of California that
the foregoing is true and correct.
Executed on January 26, 2007, at Los Angeles, California.
LA\!629959.!

Arthur Andersen Opening Brief On The Merits

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Arthur Andersen Opening Brief On The Merits

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Case No.

IN THE SUPREME COURT

RAYMOND EDWARDS II,

ARTHUR ANDERSEN LLP,

OPENING BRIEF ON THE MERITS

After a Decision by the Court of Appeal,

Los Angeles Superior Court Case No. BC 255796

Wayne S. Flick (SBN 149525) Kristine L. Wilkes (SBN 116693)

Sharon A. McFadden, Esq.

II. INTRODUCTION AND SUMMARY OF ARGUMENT 1

III. STATEMENT OF THE CASE 5

A. The Non-Compete Agreement 5

B. The Termination Of Non-Compete Agreement.. 6

C. The HSBC Transaction 7

A. Contrary To The Court Of Appeal's Decision, The

1. Section 16600 Does Not Bar All Employee

a. The plain language of Section 16600

b. The case law confirms Section

c. The Ninth Circuit's "narrow restraint"

e. Out-of-state authority supports

2. The Court Of Appeal Erred In Concluding

a. The first restriction in the Agreement

b. The second restriction in the

B. Contrary To The Court Of Appeal's Decision, The

1. Under The Labor Code, The TONC Release

2. The Court Of Appeal's Interpretation Of

a. The Court of Appeal improperly

b. The Court of Appeal improperly read

C. Both The Non-Compete Agreement And The

Adv. Bionics Corp. v. Medtronic, Inc.,

Azteca Constr., Inc. v. ADR Consulting, Inc.,

Baker Pacific Corp. v. Suttles,

Baskin-Robbins Inc. v. Patel,

BDO Seidman v. Hirshberg,

Bosley Med. Group v. Abramson,

Boughton v. Socony Mobil Oil Co.,

Brandt v. Lockheed Missiles & Space Co.,

California Steam Navigation Co. v. Wright,

Campbell v. Bd. of Trustees ofLeland Stanford Junior Univ.,

Cardiovascular Surgical Specialists, Corp. v. Mammana,

City of Torrance v. Workers' Compo Appeals Bd.,

County ofMarin v. Assessment Appeals Bd.,

County ofRiverside v. Super. Ct.,

D.A. Schulte, Inc. v. Gangi,

D'Sa v. Playhut, Inc.,

Dam, Snell & Taveirne, Ltd. v. Verchota,

Della Penna v. Toyota Motor Sales, US.A., Inc.,

Dobbins, DeGuire & Tucker, P. C. v.

E.E. O. C. v. Cosmair, Inc. v. L 'Oreal Hair Care Div.,

Edwards v. Arthur Andersen LLP,

Ex parte Howell Eng 'g & Surveying, Inc.,

Fitch v. Select Prods. Co.,

Gen. Commercial Packaging, Inc. v. TPS Package Eng'g, Inc.,

Golden State Linen Serv., Inc. v. Vidalin,

Gordon Termite Control v. Terrones,

Hill Med. Corp. v. Wycoff,

Int '1 Bus. Mach. Corp. v. Bajorek,

Jefferson v. Cal. Dep't ofYouth Authority,

John F. Matull & Assocs., Inc. v. Cloutier,

Jon~s v.Humanscale Corp.,

Korea Supply Co. v. Lockheed Martin Corp.,

Latona v. Aetna Us. Healthcare Inc.,