High Court to rule on validity of non-compete clauses: recent appellate decision places the practice in legal limbo.

California employers and labor advocates will be watching closely when the state Supreme Court takes up the issue of noncompete agreements and their validity next year.

In the meantime, the issue remains in a sort of limbo after California Appeals Court in October issued a ruling that appears to invalidate the practice. The agreements are typically made when an employee joins a firm. Usually, the pact prohibits the individual leaving a company from working for rivals. Upon leaving, a severance package is often contingent on signing a waiver of the employee's right to sue.

"The California Legislature didn't want to force people to retrain and enter into new careers any more than they wanted them to have to move 50 to 100 miles away to engage in their business," said Justice Richard Aldrich of the Appellate Court of California, Second Appellate District, which issued the recent ruling. "We interpreted California statutes to mean what they say and this is any restriction on a person's right to gainful employment is invalid and unenforceable under California law."

The ruling stemmed from a case involving L.A. tax manager Raymond Edwards, who signed a standard non-compete agreement when he started work for Arthur Andersen LLP in 1997. When HSBC Holdings PLC bought Andersen in 2002, Edwards was required to sign a termination of the non-compete as a condition of his transfer to the new company. When Edwards refused to sign it, Andersen withheld severance benefits and HSBC withdrew his job offer.

Edwards sued Andersen and HSBC in 2003 for interference with economic advantage, among other claims. A Los Angeles Superior Court dismissed Edwards' claims on summary judgment, on the grounds that both the Andersen non-compete and HSBC termination of non-compete were valid. The California Supreme Court has since agreed to hear the case in its next session, so the appellate opinion is no longer law, but the Supreme Court's decision may have an impact on whether employers offer severance benefits in the future.

The court also ruled that the HSBC waiver was invalid because it required Edwards to give up normal indemnifies given by the California Labor Code, including one's ability to sue their employer.

"Issues with respect to the release could have more wide-reaching effects because releases are so common whenever employers terminate people," said Scott J. Witlin, of Ogletree Deakins Nash Smoak & Stewart PC.

Since part of an employer's benefit in offering severance packages is the ability to avoid future litigation, Witlin said, "It may make employers more reluctant to offer severance packages in the future."