Not Waiving the Unwaivable
The California Supreme Court’s recent decision in Edwards v. Arthur Andersen, 189 P.3d 285 (Cal. 2008), is best known for rejecting the Ninth Circuit’s interpretation of California law as permitting “narrow restraints” in the employment context, a development widely noted in the blogosphere and which has already resulted in an SSRN paper posted by Lemley & Pooley. While its reaffirmance of California’s ban on noncompetition clauses in the employment context is probably the most significant aspect of the opinion, employment law profs shouldn’t ignore another aspect of the decision – its affirmation that employers may not take an adverse employment action against an employee for his refusal to waive a nonwaivable right. Edwards has already influenced the in-process Restatement of Employment Law to re-insert a provision to this effect in its treatment of the public policy tort.
Edwards arose from the sell-off of Arthur Andersen’s practice groups in the wake of its indictment in connection with the Enron scandal. HSBC wanted to acquire the group for which Edwards worked, and Andersen agreed to release him if he signed a “termination of non-compete agreement” (TONC), part of which released Andersen from claims by the employee. HSBC made Edwards an offer of employment conditional on signing the TONC. Edwards refused to sign because he believed the release required him to give up his right to indemnification against Andersen, a right that he thought especially critical because of the probability that former clients would sue Andersen and name him as a defendant. Because of this refusal, HSBC did not hire him.
Edwards then sued Andersen for intentional interference with prospective advantage (he also named HSBC, but settled with it).
The California Supreme Court addressed two issues. First, it found the Andersen noncompete invalid, rejecting Ninth Circuit cases that had found a “narrow restraint” exception to the state statute barring noncompetition clauses in the employment context. That aspect of the decision has so far garnered the most ink.
But for our purposes, the more important aspect is the court’s focus on Andersen’s requiring Edwards to sign a general release, which Edwards read as releasing, inter alia, any claim he would have for indemnification from Andersen. An employee’s right of indemnification is a creature of statute in California (Labor Code §2802), and another statutory provision declares contracts that purport to waive that right as null and void. (§2804). Thus, it appears that Edwards could have signed the release without waiving his rights – the waiver would have been invalid as to unwaivable rights such as indemnification.
But he didn’t sign it, and his refusal to do so resulted in HSBC not hiring him. The California Supreme Court bought Edwards’s argument that an adverse action for refusing to waive a nonwaivable right would be actionable. But it did not find such a waiver had been demanded in the case before it. Although the language of the release was broad enough to reach indemnification rights (like most general releases, it embraced pretty much everything), the TONC did not expressly refer to indemnification. The Edwards court therefore read it in the context of the statutory declaration that waivers of certain rights would be null and void. Accordingly, a general release is limited by the statute to claims that could (legally) be released – at least unless it explicitly purports to release unwaivable rights. There was a dissent on this point.
Some blogs have read this as the major lesson of Edwards as to unwaivable rights. And whether the result was fair to Edwards may be a matter of debate: he couldn’t have been sure that the court would have read the TONC this way (the reading violated the plain language), but he could have been confident that the release was invalid to begin with under the statute. Signing it seemed like the wiser choice – even prospectively – because his core position was that the indemnification was unwaivable. He couldn’t win unless he could prove that.
But the principle undergirding the Edwards decision is broader. We now know from the court’s invalidation of the noncompete clause that an employee may sign such an agreement with impunity where California law governs. But the second part of Edwards also means that she can also refuse to sign such a clause with impunity.
While Edwards was decided in California, it already has had a broader influence. Although early drafts of §4.02 of the Employment Restatement barred employer retaliation because an employee refused to waive an unwaivable right arising from employment (Council Draft No. 2), a later version then omitted this provision. It has now been restored in the current version (Council Draft No. 3), and it is clear that Edwards played an important role in the restoration.
Section 4.02 now provides: “An employer is subject to liability in tort under §4.01 for disciplining an employee who acting in a reasonable manner … (d) refuses to waive an unwaivable right or agree to an unenforceable condition under an employment statute or law.”
The Reporters Notes cite Edwards as indicating that refusal to sign an invalid noncompetition agreement is not a basis for discharge in California. Of course, California is unusually hostile to employment noncompetes. But all states bar unreasonable noncompetition agreements. Might the Restatement make it hazardous for employers to insist on a clause that is overbroad? Or is the legal prohibition not usually “an employment statute or law” outside of California?