Amicus Brief Kastner Banchero Supporting Edwards

8/14/2019 Amicus Brief Kastner Banchero Supporting Edwards

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No. S147190

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

RAYMOND EDWARDS II,

Plaintiff and Appellant,

v.

ARTHUR ANDERSEN, LL P

Defendant and Respondent

After a Decision by the Court of AppealSecond Appellate District, Division Three, Case No. B 178246

Los Angeles Superior Court, Case No. BC 294853Andria K. Richey, Judge Presiding

APPLICATION FO R LEAVE TO FILE BRIEF AMICUS CURIAE OF

KASTNER BANCHERO LL P IN SUPPORT OF

RESPONDENT RAYMOND EDWARDS I I

KASTNERBANCHEROLLP

EricC.

Kastner, SBN 53858Scott R. Raber, SBN 19492420 California Street, 7 th Floor

San Francisco, California 94111415-398-7000/ Facsimile (4T5) 616 ... 7000

[email protected]


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INTRODUCTION

Pursuant to California Rules of Court, Rule 8.520(), we respectfully request leave

to file the attached brief of amicus curiae Kastner Banchero LLP in support of Raymond

Edwards II. This application is timely made within thirty days after filing of the reply

brief on the merits.

THE AMICUS CURIAE

Kastner Banchero LLP ("KB") is a ten-attorney law firm with offices in San

Francisco and Palo Alto, California. A significant portion of KB ' s practice involves

employment issues relating to individual executives. KB lawyers regularly draft and

negotiate employment, severance, change of control and other employment-related

agreements. In addition, KB attorneys often represent employees in litigation against

their current and former employers in matters relating to purported breaches of non

competition agreements, trade secret matters, and other employment-related disputes.

KB estimates that its lawyers have, collectively, represented nearly three thousand

individual employees over the past twenty-three years.

INTEREST OF AMICI CURIAE AND NEED FOR FURTHER BRIEFING

The issues presented in this case directly bear on the livelihoodso f

our clients,and on employment situations that we see daily in our practice. The resolution o f the

issues before the Court will have a profound impact on our clients' employment mobility,

and their ability to engage in employment of their choosing, free from threats o f

litigation.

Amicus curiae KB is familiar with the issues before this court and the scope o f

their presentation. The amicus curiae believes that further briefing is necessary to

address matters not fully addressed by the parties' briefs: namely, the practical

experience o f individual employees under existing California non-competition law, and

the laws of other states, and their related policy ramifications. Kastner Banchero

routinely finds itselfin the proverbial "trenches" with respect to the issues presented on


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this appeal; thus, it is in a relatively unique position to offer some real-life examples o f

how the enforcement or attempted enforcement of non-competition covenants affect

California employees (and employers). Kastner Banchero's attorneys regularly represent

employees both within and outside California who are party to non-competition and

release agreements of the kinds that are at issue. Accordingly, we believe our practical

experience may provide some useful insight into the ramifications of the issues on this

appeal.

CONCLUSION

For the foregoing reasons, amicus curiae KB respectfully requests that the court

accept the accompanying brief for filing in this case.

Dated: May 14,2007 Respectfully submitted,

KASTNER BANCHERO LLP

Scott R. Raber


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PROOF OF SERVICE

I am over eighteen years of age, not a party to this case and am employed in th e

county of San Francisco. My business address is 20 California Street, Floor Seven, San

Francisco, California 94111, and I am readily familiar with the firm's business practice

for collection and processing o f correspondence for mailing with the United States Postal

Service. On Monday, May 14, 2007, in the ordinary course of business, I served the

attached PETITION FO R LEAVE T O F IL E AMCUS CURIAE BRIEF by placing a

true copy thereofin a sealed envelope with first class postage affixed, in a U.S. Mail box,

addressed as follows:

SEE ATTACHED LIST

I certify under penalty of perjury under the laws o f the State of California that the

foregoing is true and correct. Executed in San Francisco, California on May 14, 2007

~ ~ ~ ~ -


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SERVICE LIST

LA W OFFICES OF RICHARD A. GREINES, MARTIN, STEIN &LOVE RICHLAND LLPRichard A. Love Marc 1. Post11601 Wilshire Blvd., Shjueti 200 5700 Wilshire Blvd., Suite 375Los Angeles California Los Angeles, California 90036-3625

Wayne S. Flick, Esq. Kristine L. Wilkes, Esq.Yury Kapgan, Esq. Colleen C. Smith, Esq.Latham & Watkins LL:P Shireen M. Becker, Esq.633 West Fifth St., Suite 4000 Latham & WatkinsLos Angeles, CA 90071-2007 6000 West Broadway, Suite 1800

San Diego, CA 92101-3375

Shareen A. McFadden Honrable Andria K. RicheyArthur Anderson LLP Los Angeles Superior Court33 West Monroe St., Floor 18 111 North Hill St.Chicago, IL 60603-5385 Los Angeles, CA 90012Attorneys for Defendant ArthurAnderson LLP

Office of the ClerkCourt of Appeal;Second Appellate District, Div. 3

300 South Spring St.Second Floor, North TowerLos Angeles, CA 90013-1233


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No. 8147190

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

RAYMOND EDWARDS II ,

Plaintiff and Appellant,v.

ARTHUR ANDERSEN, LLP

Defendant and Respondent

After a Decision by the Court of AppealSecond Appellate District, Division Three, Case No. B178246

Los Angeles Superior Court, Case No. BC 294853Andria K. Richey, Judge Presiding

AMICUS CURIAE BRIEF OF KASTNER BANCHERO LLP

IN SUPPORT OF RAYMOND EDWARDS II

KASTNERBANCHEROLLP

Eric C. Kastner, SBN 53858Scott R. Raber, SBN 194924

20 California Street, ih

FloorSan Francisco, California 94111

415-398-7000/Facsimile (415) [email protected]

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Table of Contents

INTRODUCTION 2

INTEREST OF THE AMICUS CURIAE .3

STATEMENT OF FACTS 3

ARGUMENT 3

A. Internet Retailer v. Chief Executive Officer 6

B. Various Venture Capital Entities v. High Tech Company Founder 8

CONCLUSION 13

CERTIFICATE OF COMPLIANCE. 13


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Table of Authorities

STATUTES

Business & Professions Code 16600 3, 5, 10, 11Business & Professions Code 16601 and 16602, .4Business & Professional Code 16601-16602.5 .4Florida Statutes Annotated 542.335 6Labor Code section 2802 12Labor Code section 2802 13

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INTRODUCTION

For decades, California's prohibition on employee non-competition

covenants has stood as a bulwark against overpowering interference by

business with employees' freedom to seek employment of their choosing.

This freedom has played a significant role in driving California's economic

engine as employees leave one employer for another with potentially

competitive ideas.

Recognizing the threat that restrictive covenants pose to employees'

mobility and freedom to work, the Legislature strictly limited the statutory

exceptions to Business & Professions Code 16600 ("Section 16600") to a

narrowly defined set of circumstances. Those limited statutory exceptionshave also served California businesses well - allowing them to compete

freely for the best talent. If the Legislature had intended a "narrow

restraint" exception, or any similar relaxation to the general prohibition on

employee non-competition agreements, it could - and presumably would

have actually enacted them. The Legislature has not done so, and the Court

should not now take up the task of writing new terms into the statute.

Furthermore, the need for a clear affirmation of existing law thatgenerally prohibits employee non-competition agreements under Section

16600 is paramount. In the absence of such bright-line clarity, employees-

and the attorneys who advise them - will lack assurance that they will be

able to take subsequent employment without the risk of being sued for

running afoul of purported "narrow restraints" in their non-competition

agreements. Conversely, under the reading of Section 16600 proposed by

Arthur Andersen, employers will be unleashed to harass and restrain

employees with devastating results to employees' freedom and, ultimately,

California's economy.

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INTEREST OF THE AMICUS CURIAE

As set forth in the accompanying Application for Leave to File Brief

Amicus Curiae, the undersigned amicus Kastner Banchero LLP ("KB") is a

ten-attorney law firm with offices in San Francisco and Palo Alto,

California. A significant portion ofKB's practice involves the

representation of individual executives in employment-related matters. KB

clients comprise employees in litigation against their current and former

employers in matters relating to purported breaches of non-competition

agreements, trade secret matters, and other employment disputes. KB

lawyers regularly draft and negotiate employment, severance, change of

control and other employment-related agreements. KB estimates that itslawyers have, collectively, represented nearly three thousand individual

employees over the past twenty-three years.

Amicus KB submits this briefto provide the Court with some

practical perspective as to how the two issues presented on this appeal often

unfold under "real world" conditions - and, in particular, why existing

California law correctly disfavors non-competition agreements between

employees and employers as a matter of public policy.STATEMENT OF FACTS

KB hereby incorporates the statement of facts set forth in the

Answering Brief of Raymond Edwards.

ARGUMENT

I. SOUND POLICY REASONS EXIST FOR THE COURT

TO ADHERE TO CALIFORNIA PRECEDENT AND THE

PLAIN LANGUAGE OF BUSINESS & PROFESSIONS CODE

16600, WHICH PROHIBIT NON-COMPETITION

AGREEMENTS

The actual text of California Business & Professions Code 16600

("Section 16600") could not be clearer: the statute prohibits "every contract

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regard to the weight of California case law prohibiting employee non

competition agreements. How does such conduct arise? In California,

employers frequently write covenants not to compete into employment

agreements, even though they know the provisions stand little chance of

being upheld under current law. As with Edwards, employers with

businesses in several states try to see how far they can push restrictive

covenants in California. Employers also effectively invoke non

competition covenants in conjunction with trade secrets allegations; in such

scenarios, the employer will threaten departing employees with litigation

when they join what the company believes is a "competitive" business - no

matter how sterling an individual employee's prior record - on the basisthat the employee has allegedly misappropriated trade secrets, might reveal

them, or will necessarily divulge proprietary information in their new

position. In other states, where "narrow" non-competition covenants are

allowed, employers may seek to exclude their employees from broad,

purportedly "competitive" segments of industry or territory.

I f Section 16600 is deemed to allow "reasonable" or "narrow" non

competition agreements, so long as they are not outright "prohibitions" onan employee's trade, it will only lead to further encroachment on California

employees'rights. Under the rule advanced by Andersen, each case, no

matter how meritless, will necessarily devolve into a fact inquiry as to the

exact nature and scope of the purported "competition" between the former

and current employer before it can be dismissed or tried. In jurisdictions

where non-competition agreements are presumptively valid in certain

circumstances, or at least readily subject to a factual dispute about their

validity that precludes summary judgment in favor of the employee,

employees lose.

In practice, the "narrow restraint" reading that Arthur Andersen

erroneously says California law allows really would amount to presumptive

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restraints and control over employees; the mere possibility of an injunction

and substantial legal bills resulting from a lawsuit for purported breach of

non-competition provisions operate to chill employee mobility even further

than already occurs, irrespective of actual competition. The rule also would

provide employees, and the businesses wh o might hire them, with little

prospective guidance as to whether employees will be able to leave safely

their current employment for other opportunities without the imposition of

liability. Moreover, to allow a "trade secrets" exception to Section 16600

beyond the Uniform Trade Secrets Act would be superfluous: the latter

statute more than accomplishes its intended goals of restraining "unfair

competition" (e.g., the misappropriation of trade secrets) and providingemployers ample tools for protecting proprietary knowledge and

information.

The following actual, recent examples from our clients demonstrate

many of the foregoing issues that arise from employee non-competition

agreements, and the very real problems that arise for employees1

:

A. Internet Retailer v. Chief Executive Officer

Internet Retailer, a California company, sued its former ChiefExecutive Officer (a long-time California resident), alleging that CEO, an

at-will employee, "may" have breached his non-competition agreement and

seeking a declaration of the parties' rights under the non-competition

agreement and Florida Statutes Annotated 542.335 (which governs

Florida employee non-compete agreements). On such grounds, Internet

Retailer refused to honor CEO's vested stock options when CEO attempted

to exercise them.

Although CEO - like the almost two hundred other employees at his

company - was a California employee, he had signed an employment

Because the parties to these cases are not parties to this amicus brief,we have substituted their names with descriptive phrases.

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agreement that required the application of Florida law to his employment

relationship, presumably because Internet Retailer's parent company

("Parent Company") was based in Florida. CEO's Employment Agreement

contained a restrictive covenant prohibiting CEO from engaging in "any"

business that directly or indirectly competed with any "parent, subsidiary or

affiliate [of Internet Retailer] within the United States in the fields of on

line, video or electronic retailing during [CEO's] employment and for an

eighteen month period" after termination. Florida, it should be noted,

essentially allows the "narrow restraint" approach espoused by Arthur

Andersen: non-competition agreements are allowed insofar as they are

reasonable in duration and geographic scope.At the time Internet Retailer filed its suit against CEO, CEO served

on the Board of Directors of an online "lead generation" website. Other

than being an internet business, the purported "competitor" did not actually

sell products, but sent sales leads of possible customers to other companies,

some of whom sold products competitive to Internet Retailer.

Further compounding the dispute, CEO's employment agreement

contained an arbitration provision, mandating arbitration before theAmerican Arbitration Association in Florida, although his stock option

agreement contained no such provision and required the application of

California law to all disputes. Consequently, CEO filed separate actions in

California against Internet Retailer, and certain of its related entities, to

recover his stock; ultimately, those matters were consolidated and sent to

arbitration along with Internet Retailer's initial claim for breach of the non

competition agreement and to void the vested stock options.In arbitration, Internet Retailer's claim for breach of the non

competition survived summary judgment challenges even though:

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Internet Retailer acknowledged that CEO had never provided

the supposed competitor with any non-public, confidential or

proprietary information of ISN;

CEO introduced evidence that CEO had informed InternetRetailer of his intention to join the alleged competitor's Board

of Directors, and had received no negative feedback;

Internet Retailer and the alleged competitor occupied entirely

different niches of the online retailing world, earned revenue

through entirely different means, and had actually explored

complementary business relationships;

Two additional facts are important. First, Internet Retailer filed its, claims against CEO contemporaneously with a stock valuation it received

in connection with a possible acquisition of the business. The evidence

suggested that Internet Retailer, upon receiving the valuation, simply did

not want to provide CEO, and several other former employees, with their

stock - which was potentially worth millions of dollars. Secondly, Internet

Retailer never took steps actually to enforce the non-competition

agreement; that is, it never sought an injunction or claimed damages as a

result of the alleged breach. The non-compete claims were filed solely

because of perceived economic value to the Parent in preventing CEO from

exercising his vested stock options - not because of any "competitive"

concerns.

This case thus provides a stark example of how non-competition

agreements may naturally be used offensively, without any basis, to

hamstring an employee for years and, even more distressingly, for reasons

entirely unrelated to the claimed justifications for "non-competition"

agreements - i.e., the loss of valuable "human capital."

B. Various Venture Capital Entities v. High Tech Company

Founder

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In this case, Founder owned approximately ten percent of Company

A's stock and served as Company A's president and chairman of its board

of directors. Company A was a California business, and Founder was a

California resident.

After two rounds of financing, Company A's venture capital backers

sought to oust Founder from his position as president and his position on

the board. In furtherance of those objectives, the venture capitalists then

sued Founder for allegedly starting a "competing" business ("Company B")

and disclosing trade secrets - notwithstanding the fact that the evidence

showed that: i) Founder had obtained approval for his involvement in

Company B; ii) Company B was not engaged in the development ormanufacturing of technology competitive with Company A; iii) Company

A's venture capital backers themselves held positions on the boards of

companies that they acknowledged were competitive with Company A; and

iv) Company A could never articulate with specificity exactly what trade

secrets had supposedly been disclosed, as required by the Code of Civil

Procedure.

Company A had no actual reason to sue for protection of its tradesecrets, and the non-competition agreement was of the sort that numerous

California courts have deemed void. Thus, despite generally unfavorable

law concerning employee non-competition agreements, Company

characterizing the covenant as a "narrow restraint" - still conjured a lawsuit

against Founder.

Notwithstanding pleading and substantive legal protections, the

employers in each of these cases were able to hamstring former employees

with costly legal proceedings for months or years. This is not unusual; what

was unusual was that these employees had the means to take on well-heeled

employers. Faced with threats regarding their purported non-compete

agreements, many employees choose not to fight, and instead elect to seek

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other employment options that they believe will not draw the attention of a

former employer. And the Court should hardly expect aggressive use of

"narrow restraint" exceptions to non-competition agreements to be applied

just to upper management executives; employersuse such agreements as

cudgels against all levels of employees, particularly in circumstances where

mass defections occur from one employer to another.

Under Andersen's interpretation of Section 16600 and related case

law, examples like these will only grow in number. Andersen claims that

companies need Section 16600 to protect their "human capital" (OB 5), as

though employees were fungible goods to be accumulated or hoarded. The

metaphor is telling. As applied in practice, this ideology typically amounts,in our experience, to little more than a euphemism for attempted

"indentured servitude." Such a notion is abhorrent to California law for

good reason - it stifles employee mobility and competition among

employers for the best talent.

Andersen's position also fails to recognize that employers frequently

try to have it both ways with respect to employee mobility. On the one

hand, employers enjoy the benefits of being able to discharge employees"at will," and inevitably seek maximum flexibility to recruit employees

from competitors. On the other hand, however, Andersen's reading of

Section 16600 would grant employers, through the use of restrictive

covenants, the ability to control where, how, and when employees may

subsequently seek employment through purported "narrowly tailored" non

competes. To apply such unwritten exceptions to Section 16600 would

dramatically tip the power in employment relationships towards the

employer - absent any legislative fact-finding or statutory basis for doing

so.

Indeed, the existing exceptions to Section 16600 - concerning, for

example, the sale of a business, partners selling their partnership interests -

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are there for good reason: to protect a buyer's investment in the value of a

business's goodwill following its purchase. In other words, if an employee

sells a business he owns, the buyer can reasonably expect to enforce a non

competition agreement so that he need not find himself effectively

competing with what he presumably just purchased.

Likewise, the separate body of case law concerning trade secrets has

effectively established an "exception" to the general prohibition on

employee non-competition agreements. California law rightly deems it

"unlawful", and thus outside the scope of Section 16600, for an employee

to misappropriate trade secrets from a former employer. Moreover, under

the existing separate statutory schemes of Section 16600 and the UniformTrade Secrets Act, California law has developed more than enough checks

and balances necessary to insure that employers do not lose what it is they

claim to be most concerned about - the improper release of sensitive

information like trade secrets - while securing the rights of individuals to

seek work as they choose.

II. THE COURT SHOULD CLARIFY THAT A GENERAL

RELEASE OF "ANY AND ALL CLAIMS" BETWEENAND EMPLOYER AND EMPLOYEE VIOLATES

CALIFORNIA LAW TO THE EXTENT TH E

EMPLOYER ATTEMPTS CONTRACTUALLY TO R ID

ITSELF OF ITS STATUTORY INDEMNIFICATION

OBLIGATIONS

Andersen suggests that a litany of terrible consequences will result if

the Court finds that Andersen's attempt to have Edwards release "any and

all claims" as a condition of future employment with HSBC violated the

law. The only thing that will happen is that the Court will have made clear

that what employers often try to do in separation agreements-

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contractually run from indemnification as prescribed by the Labor Code

2802 - is, in fact, illegal.

Employers often make clear amid separation and release

negotiations that they will not - in exchange for the release - provide

indemnification for issues arising out of the former employee's

employment, notwithstanding the requirements of Labor Code 2802.

Where, as here, a departing employee may unwittingly be brought back into

criminal or other legal proceedings, this is obviously of real import to the

employee - often worth more than severance or other settlement monies.

Good drafting can, and will, mitigate any confusion that might result

from such broad releases. For example, language may simply be includedin a proposed settlement and release, noting that nothing in the release is

intended to release claims for "indemnification the employee may have, as

provided by statute, company bylaws, or pursuant to any policy of

insurance." Nothing more is required; such drafting brings a release in line

with express statutory law.

The lower court's decision correctly recognized that, to the extent an

employer seeks to foist such broad contractual release language on anemployee, it runs afoul of statutory requirements.

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CONCLUSION

For the foregoing reasons, and the reasons set forth in Edwards'

Answering Brief, the Court should affirm the lower court's ruling that

Section 16600 does not permit employee non-competition agreements, nor

does it allow "narrow restraints" on them. In addition, the Court should

affirm that broad releases of "any and all claims' run afoul of Labor Code

section 2802 insofar as they are intended to release statutory rights to

indemnification.

Dated: May 14, 2007

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Respectfully submitted,

KASTNERBANCHEROLLP

Scott R. Raber


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CERTIFICATE OF COMPLIANCE

Pursuant to California Rules of Court, rule 8.204(c)(1), the attached

Amicus Brief of Kastner Banchero was produced using 13-point Times

Ne w Roman type style and contains 2,971 words not including the tables o f

contents and authorities, caption page, signature blocks, or this Certification

page, as counted by the word processing program used to generate it.

Dated: May 14,2007

KASTNERBANCHEROLLP

B Y ~lott . Raber

Amicus Curiae

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PROOF OF SERVICE

I am over eighteen years of age, not a party to this case and am employed

in the county of San Francisco. My business address is 20 California Street,

Floor Seven, San Francisco, California 94111, and I am readily familiar with the

firm's business practice for collection and processing of correspondence for

mailing with the United States Postal Service. On Monday, May 14,2007, in the

ordinary course of business, I served the attached AMICUS CURIAE BRIEF byplacing a true copy thereofin a sealed envelope with first class postage affixed, in

a U.S. Mail box, addressed as follows:

SEE ATTACHED LIST

I certify under penalty of perjury under the laws of the State of California

that the foregoing is true and correct. Executed in San Francisco, California on

May 14,2007

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SERVICE LIST

LAW OFFICES OF RICHARD A. GREINES, MARTIN, STEIN &LOVE RICHLAND LLP

Richard A. Love Marc 1. Post11601 Wilshire Blvd., Shjueti 200 5700 Wilshire Blvd., Suite 375Los Angeles California Los Angeles, California 90036-3625

Wayne S. Flick, Esq. Kristine 1. Wilkes, Esq.Yury Kapgan, Esq. Colleen C. Smith, Esq.Latham & Watkins LL:P Shireen M. Becker, Esq.633 West Fifth St., Suite 4000 Latham & WatkinsLos Angeles, CA 90071-2007 6000 West Broadway, Suite 1800

San Diego, CA 92101-3375

Shareen A. McFadden Honrable Andria K. RicheyArthur Anderson LLP Los Angeles Superior Court33 West Monroe St., Floor 18 111 North Hill St.Chicago, IL 60603-5385 Los Angeles, CA 90012Attorneys for Defendant ArthurAnderson LLP

Office of the ClerkCourt of Appeal;Second Appellate District, Div. 3300 South Spring St.Second Floor, North TowerLos Angeles, CA 90013-1233

Documents

Amicus Brief Kastner Banchero Supporting Edwards