No.

S147190

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 Appeal

Second Appellate District, Division Three, Case No. B 178246

Los Angeles Superior Court, Case No. BC 294853

Andria K. Richey, Judge Presiding

APPLICATION FOR LEAVE TO FILE BRIEF AMICUS CURIAE OF

KASTNER BANCHERO LLP IN SUPPORT OF
RESPONDENT RAYMOND EDWARDS II

KASTNERBANCHEROLLP
Eric C. Kastner, SBN 53858
Scott R. Raber, SBN 194924
20 California Street, 7th Floor
San Francisco, California 94111
415-398-7000/ Facsimile (4T5) 616.. 7000
srraber@kastnerbanchero.com
 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 livelihoods of our clients,

and on employment situations that we see daily in our practice. The resolution of 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 of

litigation.

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

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 of individual employees under existing California non-competition law, and

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

routinely finds itself in the proverbial "trenches" with respect to the issues presented on
this appeal; thus, it is in a relatively unique position to offer some real-life examples of

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
 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 PETITION FOR LEAVE TO FILE AMCUS CURIAE BRIEF by placing a
true copy thereof in 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

~~~~-
 SERVICE LIST
LAW OFFICES OF RICHARD A.
LOVE
Richard A. Love
11601 Wilshire Blvd., Shjueti 200
Los Angeles California
Wayne S. Flick, Esq.
Yury Kapgan, Esq.
Latham & Watkins LL:P
633 West Fifth St., Suite 4000
Los Angeles, CA 90071-2007
Shareen A. McFadden
Arthur Anderson LLP
33 West Monroe St., Floor 18
Chicago, IL 60603-5385
Attorneys for Defendant Arthur
Anderson LLP
Office of the Clerk
Court of Appeal;
Second Appellate District, Div. 3
300 South Spring St.
Second Floor, North Tower
Los Angeles, CA 90013-1233
GREINES, MARTIN, STEIN &
RICHLAND LLP
Marc 1. Post
5700 Wilshire Blvd., Suite 375
Los Angeles, California 90036-3625
Kristine L. Wilkes, Esq.
Colleen C. Smith, Esq.
Shireen M. Becker, Esq.
Latham & Watkins
6000 West Broadway, Suite 1800
San Diego, CA 92101-3375
Honrable Andria K. Richey
Los Angeles Superior Court
111 North Hill St.
Los Angeles, CA 90012
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 Appeal

Second Appellate District, Division Three, Case No. B 178246

Los Angeles Superior Court, Case No. BC 294853

Andria K. Richey, Judge Presiding

AMICUS CURIAE BRIEF OF KASTNER BANCHERO LLP

IN SUPPORT OF RAYMOND EDWARDS II

KASTNERBANCHEROLLP
Eric C. Kastner, SBN 53858
Scott R. Raber, SBN 194924
20 California Street, i h Floor
San Francisco, California 94111
415-398-7000/Facsimile (415) 616-7000
ssraber@kastnerbanchero.com

1
 Table of Contents

INTRODUCTION 2
INTEREST OF THE AMICUS CURIAE .3
STATEMENT OF FACTS 3
ARGUMENT 3
A. Internet Retailer v. ChiefExecutive Officer 6
B. Various Venture Capital Entities v. High Tech Company Founder 8
CONCLUSION 13
CERTIFICATE OF COMPLIANCE. 13
 Table of Authorities

STATUTES

Business & Professions Code § 16600 3, 5, 10, 11

Business & Professions Code §§ 16601 and 16602, .4
Business & Professional Code §§ 16601-16602.5 .4
Florida Statutes Annotated § 542.335 6
Labor Code section 2802 12
Labor Code section 2802 13

11
 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 exceptions
have 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 that
generally 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.

2
 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 its
lawyers have, collectively, represented nearly three thousand individual
employees over the past twenty-three years.
Amicus KB submits this brief to 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

3
by which anyone is restrained from engaging in a lawful profession, trade
or business." (Emphasis added.) The sections following Section 16600
delineate the sole exceptions to the general rule disallowing non-
competition agreements between employers and employees (e.g., the sale of
a business to protect goodwill, dissolution of partnership interests). Cal.
Bus. & Prof. Code §§ 16601-16602.5.
The bright-line rule that has developed under California law,
prohibiting the application of non-competition agreements to individual
employees, not only adheres to the Legislature's express intent, but also
rests on sound policy principles which, if anything, have only grown in
importance as employers in and outside of California increasingly attempt
to use non-competition agreements offensively - for anti-competitive and
in terrorem reasons.
There simply is no basis for allowing "narrow restraints" or for
fashioning "reasonable" restraint tests where the Legislature has not
expresslyprovid~d for them. Unlike other states' statutory schemes,
Section 16600 includes no "reasonableness" or other limiting exception for
presumptively allowing employee non-competition agreements. California
courts have rightly upheld non-competition agreements only to the extent
they fall within the exceptions established by Business & Professions Code
§§ 16601 and 16602, or encompass the use of trade secrets.
While Andersen claims that it actually had no interest in binding
Edwards or preventing him from practicing his profession (OB 6), many
employers do not take such a benign view of their non-competition
agreements. Indeed, employers often assert violations of non-competition
agreements when it suits their own purposes - and for reasons entirely
unrelated to the "competitive" impact of the departing employee.
Even now, we routinely see in our practice employers who try to-
and actually do - impose non-competition covenants offensively, without

4
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 basis
that 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.
If Section 16600 is deemed to allow "reasonable" or "narrow" non-
competition agreements, so long as they are not outright "prohibitions" on
an 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

5
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 who 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 providing
employers 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 employees 1:
A. Internet Retailer v. ChiefExecutive Officer
Internet Retailer, a California company, sued its former Chief
Executive 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.

6
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 the
American 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:

7
 • 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 Internet
Retailer 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

8
 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 or
manufacturing 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 trade
secrets, 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

9
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; employers use 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 -

10
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 Uniform
Trade 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" BETWEEN
AND EMPLOYER AND EMPLOYEE VIOLATES
CALIFORNIA LAW TO THE EXTENT THE
EMPLOYER ATTEMPTS CONTRACTUALLY TO RID
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-

11
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 included
in 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 an
employee, it runs afoul of statutory requirements.

12
 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 Respectfully submitted,

KASTNERBANCHEROLLP

Scott R. Raber

13
 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
New Roman type style and contains 2,971 words not including the tables of
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

BY~
Slott . Raber

Amicus Curiae

14
 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 by
placing a true copy thereof in 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

15
 SERVICE LIST
LAW OFFICES OF RICHARD A.
LOVE
Richard A. Love
11601 Wilshire Blvd., Shjueti 200
Los Angeles California
Wayne S. Flick, Esq.
Yury Kapgan, Esq.
Latham & Watkins LL:P
633 West Fifth St., Suite 4000
Los Angeles, CA 90071-2007
Shareen A. McFadden
Arthur Anderson LLP
33 West Monroe St., Floor 18
Chicago, IL 60603-5385
Attorneys for Defendant Arthur
Anderson LLP
Office of the Clerk
Court of Appeal;
Second Appellate District, Div. 3
300 South Spring St.
Second Floor, North Tower
Los Angeles, CA 90013-1233
GREINES, MARTIN, STEIN &
RICHLAND LLP
Marc 1. Post
5700 Wilshire Blvd., Suite 375
Los Angeles, California 90036-3625
Kristine 1. Wilkes, Esq.
Colleen C. Smith, Esq.
Shireen M. Becker, Esq.
Latham & Watkins
6000 West Broadway, Suite 1800
San Diego, CA 92101-3375
Honrable Andria K. Richey
Los Angeles Superior Court
111 North Hill St.
Los Angeles, CA 90012
16