Case No.

S147190

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

RAYMOND EDWARDS II,

Petitioner and Appellant,
v.
ARTHUR ANDERSEN LLP,
Defendant and Respondent.

BRIEF OF AMICI CURIAE LAW PROFESSORS

AND WRITERS OF LEARNED TREATISES

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

JAMES POOLEY (SBN 58041) MARK A. LEMLEY (SBN 155830)

MORRISON & FOERSTER LLP
755 Page Mill Road
Palo Alto, California 94304-1018
Telephone: (650) 813-5600
Facsimile: (650) 494-0794
JPooley@mofo.com
Counsel ofRecord
Stanford Law School
Crown Quadrangle
559 Nathan Abbott Way
Stanford, CA 94305-8610
Telephone: (650) 723.2465
Facsimile: (650) 725.0253
mlemley@law.stanford.edu

ATTORNEYS FOR AMICI PROFESSORS

AND WRITERS OF LEARNED TREATISES

pa-1163924
 TABLE OF CONTENTS

Page

APPLICATION FOR LEAVE TO FILE BRIEF AMICI CURIAE 1

I. INTRODUCTION AND SUMMARY OF ARGUMENT 3

II. SECTION 16600 EMBODIES CALIFORNIA'S

FUNDAMENTAL PUBLIC POLICY AGAINST COVENANTS
NOT TO COMPETE 3

III. CALIFORNIA HAS NEVER ADOPTED A "PARTIAL" OR

"NARROW" RESTRAINT EXCEPTION TO THE STATUTORY
RULE 6

A. California Cases Make Clear There Is No Partial Restraint

Exception 6

B. The Ninth Circuit Cases Creating a "Narrow Restraint"

Exception Are Ill-Founded and Should Not Be Followed 10

IV. THE SO-CALLED "TRADE SECRET EXCEPTION" APPLIES

TO INDEPENDENTLY WRONGFUL CONDUCT BUT DOES
NOT PERMIT CONTRACTUAL RESTRAINTS ON THE USE
OF PUBLIC INFORMATION OR ON LAWFUL
COMPETITION 12

V. CALIFORNIA'S BAN ON EMPLOYEE COVENANTS NOT TO

COMPETE SERVES CRITICAL STATE INTERESTS 16
 TABLE OF AUTHORITIES

CASES

Advanced Bionics v. Medtronic, Inc.,

29 Cal.4th 697,59 P.3d 231 (2002) 4

Application Group, Inc. v. Hunter Group, Inc.,

61 Cal.AppAth 881 (1998) 4,5

Bosley Med. Group v. Abramson,

161 Cal.App.3d 284 (1984) 4,5

Boughton v. Socony Mobil Oil Co.,

231 Cal.App.2d 188 (1964) 10, 11

Campbell v. Trustees ofLeland Stanford Jr. Univ.,

817 F.2d499 (9thCir. 1987) 10, 11

Chamberlain v. Augustine,
172 Cal. 285 (1916) 5,6, 7, 8, 10, 11

D'Sa v. Playhut, Inc.,

85 Cal.AppAth 927 (2000) 5

Davis v. Jointless Fire Brick Co.,

300 F. 1 (9th Cir. 1924) 10

Fortna v. Martin,
158 Cal.App.2d 634 (1958) 5

Fowler v. Varian Assoc., Inc.,

196 Cal.App.3d 34 (1987) 13

Frame v. Merrill Lynch,

20 Cal.App.3d 668 (1971) 4,5, 8

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

126F.3d 1131 (9thCir. 1997) 11

Golden State Linen Service, Inc. v. Vidalin,

69 Cal.App.3d 1 (1977) 5, 14

Gordon Termite Control v. Terrones,

84 Cal.App.3d 176 (1978) 5, 8, 9
Gordon v. Landau,
49 Ca1.2d 690 (1958) 7, 12, 13
Hill Med. Corp. v. Wycoff,
86 Cal.AppAth 895 (200 1) 4, 5
Hollingsworth Solderless Terminal Co. v. Turley,
622 F.2d 1324 (9th Cir. 1980) 14

111
Hunter v. Superior Court,
36 Cal.App.2d 100 (1939) 5

International Business Machines Corp. v. Bajorek,

191 F.3d 1033 (9th Cir. 1998) 11

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

194 Cal.App.3d 1049 (1987) 14

King v. Gerold,
109 Cal.App.2d 316 (1952) ~ 10, 11

Kolani v. Gluska,
64 Cal.AppAth 402 (1998) 5, 13

Loral Corp. v. Moyes,

174 Cal.App.3d 268 (1985) 14

Merrill Lynch v. Ware,

414 U.S. 117 (1973) 4

Metro Traffic Control, Inc. v. Shadow Traffic Network,

22 Cal.AppAth 853 (1994) 5, 14

Morey v. Paladini,
187 Cal. 727 (1922) 5,6, 7, 10, 11

Morris v. Harris,
127 Cal.App.2d 476 (1954) 5, 8

Muggill v. Reuben H. Donnelley Corp.,

62 Cal.2d 239 (1965) 5,8,9, 12, 13

Readylink Healthcare v. Cotton,

126 Cal.AppAth 1006 (2005) 13

Scott v. Snelling and Snelling, Inc.,

732 F.Supp. 1034 (N.D. Cal. 1990) 4, 13

Thompson v. Impaxx, Inc.,

113 Cal.AppAth 1425 (2003) 5

Thompson v. Impaxx, Inc., supra,

113 Cal.AppAth at 429-430 14

Ware v. Merrill Lynch,

24 Cal.App.3d 35 (1972) 4

Warner and Co. v. Solberg,

634 N.W.2d 65 (N.D. 2001) 15

Winston Research Corp. v. Minnesota Mining & Mig. Co.,

350 F.2d 134 (9th Cir. 1965) 15

IV
 STATUTES

Cal. Bus. & Prof. Code § 16600 passim

Cal. Civ. Code § 3426 (Uniform Trade Secrets Act) 13, 15, 18

MISCELLANEOUS

CEB, Trade Secrets Practice in California § 2.32 6

Restatement (Third) of Unfair Competition § 39 15

Acs et al., The Knowledge Spillover Theory ofEntrepreneurship

23 (Ctr. for Econ. Policy Research, Discussion Paper No. 5326,
2005) 20

Andersson et al., The Effect ofHRM Practices and R&D Investment on

Work Productivity.
http://web.mit.edu/ipc/sloan05/HRM_R&D_Andersson_et_al.pdf.. 17

Baumol, The Free Market Innovation

Machine 121-23 (2002) 19

Fallick et al., Job Hopping in Silicon Valley,

88 Rev. Econ. Stat. 472 (2006) 17

Frischmann & Lemley, Spillovers,

107 Colum. L. Rev. 257 (2007) 18, 19

Gilson, The Legal Infrastructure ofHigh Technology Industrial

Districts: Silicon Valley, Route 128, and Covenants Not to Compete,
74 N.Y.U. L. Rev. 575 (1999) 17,21

Gorg & Hijzen, Multinationals and Productivity Spillovers 1-2

(Univ. of Nottingham, Research Paper 2004/41,2004), in
Globalisation and Productivity Growth (David Greenaway et al. eds.,
forthcoming 2006) 19

Harhoff, R&D Spillovers, Technological Proximity, and

Productivity Growth -Evidence from German Panel Data,
52 Schmalenbach Bus. Rev. 238 (2000) 20

Hays, Unfair Competition -Another Decade,

51 Cal.L.Rev. 51 14

Hyde, Working in Silicon Valley: Economic and Legal Analysis of a

High-Velocity Labor Market (2003) 16, 17, 18,21

Keller &Yeaple, Multinational Enterprises, International Trade, and

Productivity Growth: Firm-Level Evidence from the United States
26-28
(Leverhulme Ctr., Research Paper No. 03, 2003) 19

v
Malsberger ed., Covenants Not to Compete: A State-by-State Survey
(BNA Books 2d ed. 1996) 21

Pooley, Restrictive Employee Covenants in California,

4 Santa Clara Compo & High Tech. L.J. 251 (1988) 14

Pooley, Trade Secrets, § 8.02[2] 13

Paul M. Romer, The Origins ofEndogenous Growth,

8 J. Econ. Persp. 3 (1994) 18

Saxenian, Regional Advantage: Culture and Competition in Silicon

Valley and Route 128 (1994) 17,21

Schmidt, An Empirical Analysis ofthe Effects ofPatent and Secrecy on

Knowledge Spillovers 1 (Ctr. for Eur. Econ. Res., Discussion Paper
No. 06-048, 2006) 20

Valleta, On the Move: California Employment Law and High-Tech

Development, Fed. Res. Bank of San Francisco Econ. Ltr. No. 2002-
24 (Aug. 16, 2002) 17

VI
 APPLICATION FOR LEAVE TO FILE BRIEF AMICI CURIAE
Pursuant to Calif. Rule of Court 8.520(f), the undersigned request
leave to file the attached brief as amici curiae in support of respondent
Raymond Edwards II. This application is timely made.
Amici are 26 professors and writers of learned treatises in the areas
of intellectual property, trade secret law, and innovation policy. They
include law, business, and innovation professors at leading academic
institutions throughout California and the country. Among them are several
who have made the effects of Cal. Bus. & Prof. Code § 16600 a primary
area of study for many years. Amici have no personal or financial stake in
the outcome of this case, but as scholars are vitally interested in seeing that
the rules governing employee mobility encourage rather than retard
innovation. No party or other organization has paid for or authored any
part of this brief. A full list of amici is attached as Appendix A.
This amicus briefwill assist the court in two respects. First, it offers
the consensus of unbiased leading scholars in the field about the way the
law of section 16600 has developed. Second, it offers abundant economic
and empirical evidence on the effects ofthe various possible interpretations
of section 16600 offered by the parties to this case. We believe that
additional briefmg is necessary in this case in order to highlight for the
Court both the history of how section 16600 has been interpreted and the
dramatic consequences should this Court undo that long-standing
interpretation.

1
 Accordingly, we respectfully request that the Court accept and file
the attached brief amici curiae.
Dated: May 14,2007
Respectfully submitted,

JAMES POOLEY
MORRISON & FOERSTER LLP

By --+----1.------~~-=-~~.,..e_-
ames ooley
Att s for amici professors writers
of learned treatises

2
 I. INTRODUCTION AND SUMMARY OF
ARGUMENT
The Court of Appeal's interpretation of Cal. Bus. & Prof. Code
§ 16600 was correct as a matter of both law and policy, and should be
affirmed.} As a matter of law, the Court of Appeal correctly read section
16600 literally, to bar all covenants not to compete imposed on employees.
That reading was consistent with a long line of California decisions
interpreting section 16600. There is not now, and never has been, a
"narrow restraint" exception to section 16600 in California. Despite its
name, adopting such an exception would have the effect ofjudicially
overruling the statute. And the so-called ''trade secret exception" cannot
support contractual restraints on lawful competition that does not involve
misappropriation of trade secrets. As a matter of policy, this state's long-
standing interpretation of section 16600 serves a vital state interest.
California's strong innovation economy depends critically on the free
movement of employees. Judicial creation of an exception that swallows
the statutory rule would risk serious harm to California's position as a
leader in the technology industry.

II. SECTION 16600 EMBODIES CALIFORNIA'S

FUNDAMENTAL PUBLIC POLICY AGAINST
COVENANTS NOT TO COMPETE
Section 16600 voids contracts to the extent they operate to restrain
anyone from engaging in a lawful profession, trade or business. 2 The

1 Amici express no opinion on the second question before the Court.

2 The statute contains certain express exceptions for sales of interests

in a corporation or partnership.

3
statute represents a clear choice by California to reject the "rule of reason"
standard applied in many other jurisdictions. Bosley Med. Group v.
Abramson, 161 Cal.App.3d 284,288 (1984); Hill Med. Corp. v. Wycoff, 86
Cal.AppAth 895, 900-901 (2001) ("Section 16600 presently sets out the
general rule in California - covenants not to compete are void.,,).3 It
reflects a public policy so profound that courts of this state consistently
override contractual choice of law provisions that would allow enforcement
under the law of a sister state. See, e.g., Frame v. Merrill Lynch,
20 Cal.App.3d 668, 673 (1971); Ware v. Merrill Lynch, 24 Cal.App.3d 35,
43 (1972), aff'd sub nom. Merrill Lynch v. Ware, 414 U.S. 117, 139-140
(1973) ("California has manifested a strong policy of protecting its wage
earners from what it regards as undesirable economic pressures affecting
the employment relationship."); Application Group, Inc. v. Hunter Group,
Inc., 61 Cal.AppAth 881,902 (1998).4 California courts have applied the
law to condemn a wide variety of contractual restrictions that affect an

3 See also Scott v. Snelling and Snelling, Inc., 732 F.Supp. 1034,
1042 (N.D. Cal. 1990) (although "a number of states have abandoned the
common law prohibition of covenants restraining competition in the
employment agreement context, adopting instead a balancing approach
even in the face of statutes like 16600 ... [,] California courts have been
clear in their expression that section 16600 represents a strong public policy
of the state which should not be diluted by judicial fiat.").

4 In Advanced Bionics v. Medtronic, Inc., 29 Cal.4th 697, 59 P.3d

231 (2002), this Court overturned an injunction against Medtronic
proceeding with a suit in Minnesota to enforce a noncompetition
agreement. It did so for reasons of interstate comity, however, not because
it questioned the public policy behind section 16600. Indeed, the Advanced
Bionics Court "agree[d] that California has a strong interest in protecting its
employees from noncompetition agreements under section 16600." Id. at
706,59 P.3d at 237.

4
individual's ability to move freely from job to job. See, e.g., Application
Group, supra; Bosley, supra; Chamberlain v. Augustine, 172 Cal. 285, 288-
289 (1916); Fortna v. Martin, 158 Cal.App.2d 634,638 (1958); Frame,
supra; Golden State Linen Service, Inc. v. Vidalin, 69 Cal.App.3d 1, 12
(1977); Gordon Termite Control v. Terrones, 84 Cal.App.3d 176, 179
(1978); Hill Med. Corp., supra; Hunter v. Superior Court, 36 Cal.App.2d
100, 114 (1939); Kolani v. Gluska, 64 Cal.App.4th 402,407 (1998); Metro
Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 859-
860 (1994); Morey v. Paladini, 187 Cal. 727, 736 (1922); Morris v. Harris,
127 Cal.App.2d 476,478 (1954); Muggill v. Reuben H Donnelley Corp.,
62 Cal.2d 239,242-243 (1965). For similar policy-based reasons,
California courts have held that an employer commits an act of wrongful
discharge when firing an employee for refusing to sign a non-competition
agreement. See, e.g., D'Sa v. Playhut, Inc., 85 Cal.App.4th 927,933
(2000) and Thompson v. Impaxx, Inc., 113 Cal.App.4th 1425 (2003).
This Court should reject Andersen's strained argument that a
restriction on competition cannot be a "restraint" unless someone is entirely
barred from employment. (Op. Br. at n.4). That is not the ordinary meaning
of the term "restraint." Someone can be restrained without abandoning any
action at all. A leash is a "restraining device" even though it permits some
limited freedom of movement, for example. Nor is Andersen's "complete
prohibition" the meaning California courts have given the term. Tellingly,
none of the voided contracts just cited sought to prevent the individual from
an entire field of endeavor, but merely from aspects of it, such as serving
certain customers or competing with a certain company.
The legislature has amended various portions of the statute in 1945,
1963 and 2002, and at no time has it seen fit to change or even question its

5
interpretation by California courts as a broad prohibition against all fonns
of restraints which are not expressly allowed. Andersen (Op. Br. at 28,
Rply. Br. at 13) makes the bizarre argument that this legislative silence
infers approval of the Ninth Circuit's "narrow restraint exception", which
we address below, and implicit rejection of the more than 15 California
appellate decisions that contain no such exception. But there is no logical
basis for concluding that the legislature was ignorant of the decisions of our
own state courts, including this Court, and was tuned in instead exclusively
to the contrary interpretation offered by a handful of federal cases. 5

Ill. CALIFORNIA HAS NEVER ADOPTED A

"PARTIAL" OR "NARROW" RESTRAINT
EXCEPTION TO THE STATUTORY RULE
Section 16600 is simple and straightforward: to the extent any
contract restrains otherwise lawful competition, it is void. The plain
meaning of "restraint" is reason enough to conclude that the covenant
involved in this case is unenforceable. But Andersen would have this Court
sanction a "narrow restraint exception" that not only relies on a misreading
of our state's precedents, but that would if adopted swamp the rule in a
wave of "partial" restraints.

A. California Cases Make Clear There Is No

Partial Restraint Exception
In Chamberlain v. Augustine, supra, 172 Cal. at 289, and again in
Morey v. Paladini, supra, 187 Cal. at 738, this Court declared that there is
no such thing as a "partial restraint" under the predecessor to section

5Commentators have noted the conflict. See, e.g., CEB, Trade

Secrets Practice in California § 2.32, p. 54 ("The federal cases appear
inconsistent with California law.").

6
16600. In Chamberlain, the covenant barred defendant for three years from
any involvement in a business "similar" to the foundry whose stock he had
sold. The plaintiff argued that the restriction was limited to the states of
California, Washington, and Oregon; that the defendant could work as a
"laborer or molder" in certain designated foundries; and that the covenant
was therefore "only a partial restraint". The argument was easily rejected:
"The statute makes no exception in favor of contracts only in partial
restraint of trade." 172 Cal. at 289. In Morey, the alleged agreement was
with a lobster fishery to sell only to a single purchaser in northern
California, Oregon, Washington and Nevada, who in return promised to
buy a large amount of lobsters on a continuing basis. When sued for failure
to buy, the purchaser argued the contract was illegal. Observing that "the
contract was one which would result in at least a partial restraint of trade",
187 Cal. at 736, this Court agreed it was unlawful, since "[t]he statute
(Civ. Code, sec. 1673) makes no exception in favor of contracts only in
partial restraint of trade." Andersen never discusses Morey, and
mischaracterizes Chamberlain as involving a "complete restriction on the
seller's ability to engage in the foundry business ...." (Op. Br. at 22;
emphasis in original)6

6Andersen attempts (Op. Br. at 19-20) to contrast this misleading

picture of Chamberlain with Gordon v. Landau, 49 Cal.2d 690 (1958),
which it argues involved a non-compete agreement comparable to the one
imposed here by Andersen. But this ignores the very important
characterization by this Court of the agreement in that case: the defendant
"merely agreed not to use plaintiff s confidential lists to solicit customers
for himself for a period of one year following termination of employment".
49 Cal.2d at 694. This language was the genesis of the "trade secret
exception", discussed infra in section V.

7
 Clearly, any covenant not to work for a competitor is a "partial"
restraint, since the typical employee can ply his or her skills in other ways.7
Yet as noted above, California courts have repeatedly held that post-
employment non-competition agreements run afoul of section 16600. In
the leading case of Muggill v. Reuben H Donnelley Corp., supra, 62 Ca1.2d
at 243 (1965), Justice Traynor explained that section 16600 "invalidates
provisions in employment contracts prohibiting an employee from working
for a competitor after completion of his employment ...." Citing Muggill,
as well as Chamberlain, the court in Gordon Termite Control v. Terrones,
supra, 84 Cal.App.3d at 179, voided a contract that required an employee to
pay $50 each time he called on a customer that he worked with at a former
employer. 8 Andersen (Op. Br. at 26-27) waves off these cases as part ofa
supposedly anomalous "handful" that in any event "do not support an

7 Consider a carpenter barred by contract from competing with a

homebuilding company; he could be employed building sets for a movie
studio. A stockbroker leaving a brokerage (cf. Frame v. Merrill Lynch,
supra) can become an investment advisor. These examples (and many
more which come to mind) expose the fallacy of arguing "partial restraint":
almost any restraint can be described as substantially less than the whole of
a trade, profession or business.

8 Gordon Termite Control also relied on Morris v. Harris, supra,

another case involving post-employment payments for calling on
previously-serviced customers. Citing Chamberlain, the Morris decision
rejected an argument that the contract was "only a restriction and not a
restraint". 127 Cal.App.2d at 478. Ironically, Andersen uses a similar
semantic argument (prohibition versus restriction) in trying to distinguish
Morris. (Op. Br. at 43)

8
absolute prohibition on non-competition agreements". 9 This observation is

curious, since each of these decisions considered, and found wanting, a

non-competition agreement. (Muggill at 240 n.l: payments will terminate

if employee "enters any occupation or does any act which ... is in

competition with ... Employer"; Gordon Termite: employee agreed "that

should he terminate . . . he will not call on any accounts called on" while

working for his former employer.).

Andersen calls for "clarity" in application of section 16600.

(Op. Br. at 14). California courts have in fact established a perfectly clear

rule: the statute means what it says - that restraints on competition are

invalid. It is Andersen's approach that would generate profound

uncertainty. How could one determine what is a "narrow" restraint, other

than by post hoc conclusions? Indeed, in practice this "exception" would

certainly swallow the rule. What would be left to prohibit, if the statute

allowed restraints up to, but some indeterminate amount short of, a

comprehensive bar on pursuing a trade? What employee would have the

resources to litigate whether the line was drawn properly in his or her case?

What employer would readily hire an employee subject to such an uncertain

potential restraint? Where the "partial" or "narrow" restraint inevitably

leads is to some version of the "rule of reason" approach, one which this

state's legislature soundly rejected over a century ago. See section III,

supra. As implemented in a jurisdiction like California with no developed

jurisprudence on what are "reasonable" post-employment restraints, this

9Andersen strangely criticizes Gordon Termite Control for

"unquestioningly" following Muggill, which is presumably what courts of
appeal are supposed to do with this Court's precedent.

9
new regime would dramatically discourage employee mobility and put at
risk one of the world's most vibrant economies (see section VI infra).

B. The Ninth Circuit Cases Creating a "Narrow

Restraint" Exception Are Ill-Founded and
Should Not Be Followed
Andersen relies on a trio of Ninth Circuit cases beginning with
Campbell v. Trustees ofLeland Stanford Jr. Univ., 817 F.2d 499 (9th Cir.
1987). Those cases rely on a strained reading of California precedent, and
this Court should not abandon the statutory language and the consistent
reading given it by California courts merely to blindly follow cases decided
by a court that was itself supposedly following this Court's rule in the fIrst
place. Campbell, while recognizing that California had rejected the rule of
reason in enacting section 16600, chose nonetheless to import such a rule
into California law under a diffetent name. Campbell's basis for that
decision was dubious. It relied on a single appellate court opinion,
Boughton v. SoconyMobil Oil Co., 231 Cal.App.2d 188 (1964), for the
proposition that the statute did not apply "where one is barred from
pursuing only a small part of [a] business, trade or profession." 817 F.2d at
502. Inexplicably, Campbell did not address this Court's unmistakable
holdings to the contrary in Chamberlain and Morey, or its own precedent in
Davis v. Jointless Fire Brick Co., 300 F. 1,3 (9th Cir. 1924), which had
expressly followed Chamberlain in rejecting a "partial restraint" argument.
But in any event its reliance on the Boughton dictum lO was misplaced, since
Boughton had relied for its "small or limited part" exception on King v.

10 Boughton, as the Court of Appeal noted below, involved a

restriction on the use of land, a very specifIc circumstance that only
obliquely involved section 16600.

10
Gerold, 109 Cal.App.2d 316 (1952), a case that even the Campbell court
found to hold no such thing. 11 See Boughton, 231 Cal.App.2d at 192.
From this inauspicious beginning the "narrow restraint exception"
took root in Ninth Circuit jurisprudence with an unusual deference to its
questionable provenance. In General Commercial Packaging, Inc. v. TPS
Package Engineering, Inc., 126 F.3d 1131, 1133 (9th Cir. 1997), the court
cited to the "rule of Campbell" as if it were the pronouncement of this
Court, rather than a flawed interpretation of two appellate opinions. Once
again, the Ninth Circuit inexplicably ignored this Court's rulings in
Chamberlain and Morey. It did so again in International Business
Machines Corp. v. Bajorek, 191 F.3d 1033, 1041 (9th Cir. 1998),
concluding that Ninth Circuit, not California, precedent bound the court to
follow the "narrow restraint" exception it had created: "We are not free to
read California law without deferring to our own precedent on how to
construe it. . . . Because of the limited scope of the restriction [against
working for a competitor], we are bound to hold, under Campbell, General
Commercial Packaging, and Smith, that the covenant did not violate section
16600." 191 F.3d at 1041.
It is past time to address and correct the Ninth Circuit's creation of
the "narrow restraint exception". It was based originally on unreliable
analysis that ignored this Court's rulings and the Ninth Circuit's own
precedent, and it grew primarily through circular reasoning and self-

King did not involve a restraint against producing "competing

11
models" of the licensed product, but only the specific product licensed.

11
citation. There is no reason to adopt, and many compelling reasons not to
adopt, this jurisprudential aberration. 12

IV. THE SO-CALLED "TRADE SECRET

EXCEPTION" APPLIES TO INDEPENDENTLY
WRONGFUL CONDUCT BUT DOES NOT
PERMIT CONTRACTUAL RESTRAINTS ON
THE USE OF PUBLIC INFORMATION OR ON
LAWFUL COMPETITION
As noted above, in Gordon v. Landau this Court considered a
covenant directed at misuse of a route salesman's account cards, which
carried detailed information about each customer and their buying habits.
The Court noted that the restriction did not prevent lawful competition, but
was directed at use of these "confidential lists to solicit customers" after
leaving employment. This decision was cited in Muggill, creating the so-
called ''trade secret exception". 62 Ca1.2d at 242 (section 16600 invalidates
non-competition agreements "unless they are necessary to protect the
employer's trade secrets").
We say "so-called", because the concept is mis-named. It is not an
exception at all, since it only applies to activity, such as misuse of trade
secrets or breach of fiduciary duty, that the law would prohibit in the
absence of a contract. It follows that any contract that also prohibits such

12 Andersen argues (Op. Br. at 15-18, Rep. Br. at 7 n.8) that the
decision of the Court of Appeal below improperly found an exception for
contracts other than those with employees. This is a straw man. Section
16600 by its terms is meant to regulate restrictions on individuals' work.
Apart from agreements with employers, the only other sort of contract that
could be implicated is one between organizations that restrains someone's
rights to work (for example, an agreement between competitors not to hire
each other's engineers for a period of time). The Court of Appeal had no
reason to venture beyond the fact situation presented to it; but there is also
no reason to apply a different analysis to contracts between entities.

12
activity is not a "restraint" of a "lawful profession, trade or business.,,13
These cases, in other words, stand for nothing more than the
straightforward proposition that section 16600 doesn't void or preempt the
operation of California trade secret law.
The dictum from Muggill, however, has been repeated without much
analysis in a number of subsequent cases. 14 Although the Court of Appeal
below concluded that the record was insufficiently developed to address the
"trade secret exception", 47 Cal.Rptr.3d at 796, its conclusion seems to
have been based on an assumption that proof of an interest in trade secrets
might provide legitimacy to the non-competition covenant. But that
assumption is incorrect. If there is any "trade secret exception" in modem
law, it means only that non-disclosure agreements are valid under section
16600. See Kolani v. Gluska, 64 Cal.App.4th 402,407 (1998) ("Narrower
contractual restraints on a departing employee, which prohibit him/her from
using confidential information taken from the former employer, have been
held to be lawful." [citing Gordon v. Landau, 49 Cal.2d at 694]); Readylink
Healthcare v. Cotton, 126 Cal.App.4th 1006, 1022 (2005)

13This does not mean that such contracts are entirely superfluous,
since they serve important collateral purposes, such as establishing a
confidential relationship, defining its subject matter, and proving
reasonable efforts to protect trade secrets. See Pooley, Trade Secrets, §
8.02[2] (Law Journal Press). Moreover, contracts can specify additional
remedies for misappropriation. See also Uniform Trade Secrets Act, Civ.
Code § 3426.7(b) (contractual remedies not displaced).

14 See, for example, Scott v. Snelling & Snelling, Inc., 732 F.Supp.
1034, 1043 (N.D. Cal. 1990) (declining to enforce non-competition
agreement); and Fowler v. Varian Assoc., Inc., 196 Cal.App.3d 34, 43-44
(1987) (no non-competition covenant involved).

13
("Misappropriation of trade secret information constitutes an exception to
section 16600.,,)].15

That the statute does not void promises of confidentiality should not
be surprising. No California case has ever overthrown a nondisclosure
agreement as a restraint of trade; but just as importantly, none has ever
upheld a non-competition agreement because of a ''trade secret exception."
In effect, the "exception" merely reflects the well-accepted notion that "'the
employer will be able to restrain by contract only that conduct of the former
employee that would have been subject to judicial restraint under the law of
unfair competition, absent the contract.'" Metro Traffic Control, Inc. v.
Shadow Traffic Network, 22 Cal.App.4th 853, 861 (1994) (quoting Hays,
Unfair Competition -Another Decade, 51 Cal.L.Rev. 51, 69); see also
Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1338 (9th
Cir. 1980) (same).
In any event, any trade secret "exception" in modem parlance must
take account of the more robust protection afforded secret information

15 Dictum from one case, Loral Corp. v. Moyes, 174 Cal.App.3d

268,275 (1985), suggests that "contractual restrictions may have more
impact in a non-solicitation case than a nondisclosure case." But the
analysis in Loral (and in a case that cited it, John F. Matull & Assoc.,
Inc. v. Cloutier, 194 Cal.App.3d 1049 (1987)) was flawed; see Pooley,
Restrictive Employee Covenants in California, 4 Santa Clara Compo &
High Tech. LJ. 251,264-276 (1988). A more recent case, Thompson v.
Impaxx, Inc., supra, 113 Cal.App.4th at 429-430, reaffirms that
nonsolicitation covenants are enforceable only to the extent that misuse of
trade secrets is involved. Andersen (Op. Br. at 24) criticizes the Court of
Appeal for not considering Loral, or dictum from another nonsolicitation
case, Golden State Linen Servo v. Vidalin, 69 Cal.App.3d 1,9 (1977); but
there was no particular reason for the court to do so, since Edwards had not
challenged that part of the agreement. 47 Cal.Rptr.3d at 797 n.4.

14
under the Uniform Trade Secrets Act, Civil Code § 3426. Before
enactment of that statute, California common law on trade secrets was
based largely on the Restatement (First) of Torts, which defined trade
secrets relatively narrowly, excluding "emphemeral" information such as
unpublished bids, and "negative" information such as the results of
unsuccessful experiments. 16 Even if one might have argued the need for
supplemental contractual protection of information when trade secret law
was narrower, such arguments have no force at all today, when the
extremely broad statutory definition of a trade secret covers virtually all
nonpublic information that a business may want to protect. 17 The important
conclusion from this development is that there is no justification for
seeking contractual protection for information that does not qualify as a
trade secret under the UTSA, since such information is undeserving of any
protection at all.
The trade secret "exception," in short, cannot be used to justify a
non-competition covenant that restricts an employee from competing in a
way that would not use a trade secret; the "exception" merely explains why
non-disclosure agreements are valid when used to protect real trade secrets.

16See Restatement (Third) of Unfair Competition § 39, comment d.

Cf. Winston Research Corp. v. Minnesota Mining & MIg. Co., 350 F.2d
134, 144 (9th Cir. 1965) (in pre-UTSA decision, held information about
problems with company's machine cannot qualify as trade secret).

17 See Warner and Co. v. Solberg, 634 N.W.2d 65, 72 (N.D. 2001)
(applying North Dakota statute similar to section 16600, and in reference to
California decisional law, finding that since enactment of the UTSA the
"need to create a judicial exception ... may now be questioned.").

15
 v. CALIFORNIA'S BAN ON EMPLOYEE
COVENANTS NOT TO COMPETE SERVES
CRITICAL STATE INTERESTS
Reading Andersen's briefs, one might have the impression that
section 16600 is a poorly-drafted accident that was never intended to mean
what it says. Nothing could be further from the truth. California's long-
standing ban on employee covenants not to compete is a centerpiece of
state innovation policy, and it is perhaps the most important reason why
California has enjoyed its leading position in the technology industries over
the past 25 years.
Most states other than California enforce employee covenants not to
compete. The fact that California does not enforce them has led to what
Alan Hyde has called a "high-velocity labor market": one in which
employees can and do change jobs with some frequency. Alan Hyde,
Working in Silicon Valley: Economic and Legal Analysis of a High-
Velocity Labor Market (2003). The ability to leave ajob and continue to
work in one's chosen profession - something taken for granted in
California but subject to significant restrictions elsewhere - obviously
benefits employees, who are not bound to bad jobs by fear that they will be
unemployable or at least underemployed if they choose to leave. But less
obviously, it also benefits employers and the economy as a whole. While
employers whose employees want to leave may have a short-term, selfish
interest in making it hard for them to do so, those same employers benefit
in the long run by being able to hire new employees away from competitors
without fear of legal sanction. And perhaps most important, California's
rule protecting the freedom of departing employees to compete encourages
employees who think they can build a better mousetrap (or a better
computer chip or search engine) to start a new company to do just that.

16
 Those start-ups have contributed enormously to the California
economy, to such an extent that regions all over the world have sought to
emulate Silicon Valley. But as a number of legal and economic studies
have shown, those efforts to be like Silicon Valley have failed. Annalee
Saxenian, Regional Advantage: Culture and Competition in Silicon Valley
and Route 128 (1994). Notably, work by legal scholars and social scientists
suggest that Silicon Valley has succeeded where others have failed in
significant part because of California's rule prohibiting employee
covenants not to compete, which led to high rates of employee mobility.
See, e.g., Saxenian, supra, at 34-35, 161-68 (documenting the high rates of
employee mobility in Silicon Valley, and attributing the success of
innovation in the Valley in part to that difference); Ronald J. Gilson, The
Legal Infrastructure ofHigh Technology Industrial Districts: Silicon
Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. Rev. 575,
577-78 (1999); Bruce C. Fallick et aI., Job Hopping in Silicon Valley,
88 Rev. Econ. Stat. 472 (2006) (providing empirical support for the
Saxenian-Gilson argument); Fredrik Andersson et aI., The Effect ofHRM
Practices and R&D Investment on Work Productivity.
http://web.mit.edu/ipc/sloan05/HRM_R&D_Andersson_et_aI.pdf; Rob
Valleta, On the Move: California Employment Law and High-Tech
Development, Fed. Res. Bank of San Francisco Econ. Ltr. No. 2002-24
(Aug. 16, 2002).
The explanation is straightforward: start-ups drive new innovation.
The biggest source of start-ups is employees who depart from existing
companies. See Hyde, supra, at 31-32 (reporting a study of hard-drive
manufacturing, in which departing-employee start-ups accounted for over
99% of start-up revenue). Those new companies grow, employing workers,

17
developing better products, and contributing to the state's economic
growth. They in tum spawn new companies as employees depart the
companies that were once start-ups and develop their own new companies
and products. The economy as a whole benefits from this cycle of
innovation.
Those who argue for restrictions on employee mobility and the
development of start-ups generally worry that existing companies will lose
incentives to innovate if departing employees can take their know-how and
compete with them. There are three answers to this objection. First, as we
have seen, section 16600 does nothing to prevent the enforcement of trade
secret law. Companies who choose to do so can enforce their statutory
rights under Cal. Civ. Code § 3426 to ensure that departing employees
cannot use a former employer's trade secrets. What they cannot do is
prevent employees from competing even when those employees do not use
any trade secrets. It is that freedom that has made Silicon Valley possible.
Second, it is not corporations per se but the individuals who work for
them who come up with new ideas. An employee who cannot start a new
business cannot profit from an entrepreneurial idea, and so has less
incentive to try to develop new ideas for an existing employer. An
important benefit of a high-velocity labor market like California's is that it
provides the maximum incentive to individuals to invent and pursue new
ideas. See Hyde, supra, at 52. Those incentives are likely more important
than corporate investment incentives in many cases. This is particularly true
since, as Paul Romer has explained, corporations will continue to invest in
innovation even if they cannot capture all the benefits from that innovation,
as long as they make enough money to turn a profit. Paul M. Romer, The
Origins o/Endogenous Growth, 8 J. Econ. Persp. 3 (1994); Brett M.

18
Frischmann & Mark A. Lemley, Spillovers, 107 Colum. L. Rev. 257
(2007).
Third, the benefits of the "spillovers" of ideas that come with
employee mobility are large enough to outweigh any harm to former
employers, and indeed so great that even the fortner employers themselves
benefit from California's high-velocity labor market. A wealth of
economic evidence teaches us that these spillovers are good for society.
There is no question that inventions create significant social benefits
beyond those captured in a market transaction. Statistical evidence
repeatedly demonstrates that innovators capture only a small proportion of
the social value of their inventions. See, e.g., Frischmann & Lemley,
supra, at fn. 5 (collecting the dozens of economic studies proving this
point). These spillovers benefit not only consumers but also third parties,
including competitors and potential competitors. Employees at an
innovative company acquire knowledge about innovative products and
processes that they can put to use elsewhere. 18 The public as a whole also
benefits from new sources of innovative products. See William J. Baumol,
The Free Market Innovation Machine 121 ..23 (2002).

18 See, e.g., Holger Gorg & Alexander Hijzen, Multinationals and

Productivity Spillovers 1-2 (Univ. of Nottingham, Research Paper 2004/41,
2004), in Globalisation and Productivity Growth (David Greenaway et al.
eds., forthcoming 2006) (noting ways in which spillovers to competitors
occur); W. Keller & S. Yeaple, Multinational Enterprises, International
Trade, and Productivity Growth: Firm-Level Evidence from the United
States 26-28 (Leverhulme Ctr., Research Paper No. 03,2003), available at
http://www.nottingham.ac.ukleconomics/leverhulme/research-papers/03_
03.pdf (documenting their significance).

19
 Far from interfering with incentives, empirical evidence suggests
that these spillovers actually drive further innovation. Industries with
significant spillovers generally experience more and faster innovation than
industries with fewer spillovers. 19 Dietmar Harhoff fmds empirical
evidence that firms in high-technology industries (the most innovation-
intensive ones) are likely to increase rather than decrease their investment
in research and development in the face of significant intra-industry
spillovers. Harhoff, supra, at 258. Acs et al. argue that this is because the
spillovers are creating opportunities to be exploited by entrepreneurs such
as departing employees. Zoltan J. Acs et aI., The Knowledge Spillover
Theory ofEntrepreneurship 23 (Ctr. for Econ. Policy Research, Discussion
Paper No. 5326, 2005), available at
http://papers.ssm.com/so13/papers.cfm?abstract id=873614. But these
entrepreneurs aren't engaging in incentive-draining free riding; rather, they
are part of a virtuous circle because they are in tum creating new
knowledge spillovers that support still more entrepreneurial activity.

19 See, e.g., Dietmar Harhoff, R&D Spillovers, Technological

Proximity, and Productivity Growth - Evidence from German Panel Data,
52 Schmalenbach Bus. Rev. 238, 258 (2000) ("High-technology firms react
more sensitively to spillovers in terms of their R&D spending, and their
direct marginal productivity gain from spillovers (in excess to the effect
from enhanced R&D spending) is considerably larger than the respective
gain for less technology-oriented firms."). Indeed, the positive relationship
is so strong that some economists use spillovers as a measure of innovation!
See Tobias Schmidt, An Empirical Analysis ofthe Effects ofPatent and
Secrecy on Knowledge Spillovers 1 (Ctr. for Eur. Econ. Res., Discussion
Paper No. 06-048, 2006), available at ftp://ftp.zew.de/pub/zew-
docs/dp/dp06048.pdf.

20
 One need not rely only on economic theory or empirical studies to
explain why a free labor market is a good thing for innovation incentives.
History teaches this lesson as well. The computer industry is an obvious
example. Both Annalee Saxenian and Ron Gilson have shown that
spillovers drove innovation in that industry: Silicon Valley thrived while
Boston's Route 128 withered in the 1980s and 1990s in significant part
because employees and knowledge moved freely to new companies in
Silicon Valley, but not in Boston. See Saxenian, supra, at 161-68; Gilson,
supra, at 577-78. And as Alan Hyde puts it, no shortage of innovation
resulted:

In California, employees are normally free to

change jobs without a lawsuit alleging ...
breach of a covenant not to compete. There is
no evidence of any social harm from this. In
particular, there is no evidence that firms lack
incentives to invest in the production of
information.
Hyde, supra, at 43.
The fact that numerous social science studies have shown that
California's free labor movement policy drives technological innovation
provides a strong policy reason for the Court to refrain from overturning the
legislature's judgment. The presence of even so-called "reasonable"
restraints on employee mobility, as exist in Massachusetts and other eastern
states, interferes with the free development of vital new industries. Nor
does calling those restraints "narrow" solve the problem. States like
Montana and Oklahoma, in which the judiciary has rewritten free-
employee-mobility legislation to permit such "narrow" restraints, see
Brian M. Malsberger ed., Covenants Not to Compete: A State-by-State
Survey (BNA Books 2d ed. 1996), hardly have the sort of vibrant

21
technology economy California should wish to emulate. California should
not risk killing the goose that laid the golden egg by undoing the
longstanding policy against enforcing employee covenants not to compete.
Dated: May 14, 2007
Respectfully submitted,

JAMES POOLEY
MORRISON & FOERSTER LLP

Ja es ooley
Atto s for amici professors
of learned treatises

22
 Appendix A: List of Signatories 20

Professor John R. Allison

Spence Centennial Professor
Graduate School of Business
University of Texas at Austin

Professor John R. Barton

George E. Osborne Professor Emeritus
Stanford Law School

Professor Lorelei R. de Larena

Florida State University College of Law

Professor Rochelle Cooper Dreyfuss

Pauline Newman Professor
NYU School of Law

Professor Sheri J. Engelken

Gonzaga University School of Law

Professor William T. Gallagher

Golden Gate University School of Law

Professor Shubha Ghosh

SMU Dedman School of Law

Professor Ronald J. Gilson

Meyers Professor of Law and Business
Stanford Law School

Professor Eric Goldman

Santa Clara University School of Law

20 Amici are participating in this brief in their personal capacity.

Institutions are listed for identification purposes only.

1
Professor Alan Hyde
Visiting Professor, Cornell Law School
Sidney Reitman Scholar
Rutgers University School of Law

Professor Mark A. Lemley

William H. Neukom Professor
Stanford Law School

Professor Lawrence Lessig

C. Wendell & Edith M. Carlsmith Professor
Stanford Law School

Professor Gillian Lester

Boalt Hall School of Law
University of California at Berkeley

Professor David Levine

Charlotte School of Law

Professor Michael J. Madison

University of Pittsburgh School of Law

Professor Stephen Melohn

Suffolk University Law School

Professor Michael A. Mireles

University of Denver College of Law

Professor Viva R. Moffat

University of Denver College of Law

Professor Tyler T. Ochoa

Santa Clara University School of Law

Professor Sean O'Connor

Visiting Professor, Boalt Hall School ofLaw, UC Berkeley
University of Washington School of Law

James Pooley
Lecturer in Law, Boalt Hall School of Law
University of California at Berkeley
Author, Trade Secrets (Law Journal Press)

2
Professor Michael Risch
West Virginia University College of Law

Professor Joshua D. Sarnoff

Glushko-Samuelson Intellectual Property Law Clinic
Washington College of Law
American University

Professor Kurt M. Saunders

Chair, Department of Business Law
California State University - Northridge

Dean AnnaLee Saxenian

School of Information
University of California at Berkeley

Professor Jennifer M. Urban

Director, Intellectual Property and Technology Clinic
University of Southern California School of Law

3
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Dated: May 14, 2007

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MORRISON & FOERSTER LLP

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