Entertainment Companies Beware: California Supreme Court Affirms Ban on “Limited” Noncompetition and Nonsolicitation Agreements
In August 2008, California's Supreme Court rejected the use of noncompetition and nonsolicitation provisions in the context of an employment relationship in Edwards v. Arthur Anderson LLP. As a result of the decision in Edwards, the only exceptions to the rule that noncompetition and nonsolicitation provisions are illegal are (a) for contracts involving the sale of a business or shares of stock in a corporation, or (b) for provisions that are necessary to protect confidential, proprietary and trade secret information.
In light of the Edwards decision, media and entertainment companies should carefully review their California-based agreements for both their talent and executives who are located in California to ensure that they come under one of the two exceptions noted above.
Noncompetition agreements for California employees which do not come under one of the two above exceptions—regardless of their limited scope or duration—are void, and an attempt to include and/or enforce these types of provisions may expose the employer to liability under the unfair competition laws of California. The Supreme Court found in Edwards that an employer that requires employees to sign an agreement containing such a clause may commit an unlawful business practice and may otherwise be subject to tort damages. For a further discussion on the Edwards decision, see the advisory from Davis Wright Tremaine's Employment Law Group.
It is important to note that most states permit noncompetition agreements which are reasonable and limited in their scope, time and geographic reach; thus, an employer should review that state's law before requiring those types of agreements. Where there are sufficient non-California contacts, it may be possible to avoid application of California law by contractual choice of law and venue provisions.
However, as of Aug. 6, 2008, New York law is now similar to California law for some media and entertainment industries. New York just passed the Broadcast Employees Freedom to Work Act, which specifically prohibits noncompetition agreements with employees in the television, radio and cable industries. See A.2124-A John/S.2393-A Leibell. For additional information, also see the press release issued by the New York State Governor's Office.