Amicus Brief Professors Supporting Edwards

8/14/2019 Amicus Brief Professors Supporting Edwards

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Case No. S147190

IN THE SUPREME COURTOF THE STATE OF CALIFORNIA

RAYMOND EDWARDS II,Petitioner andAppellant,

v.

ARTHUR ANDERSEN LLP,Defendant andRespondent.

BRIEF OF AMICICURIAE LAW PROFESSORSANDWRITERS OF LEARNED TREATISES

After a Decision by the Court ofAppeal,SecondAppellate District, Division ThreeCase No. B178246Los Angeles Superior Court Case No. BC 255796

Honorable Andria K. Richey, Judge

JAMES POOLEY (SBN 58041)MORRISON & FOERSTER LLP755 Page Mill RoadPalo Alto, California 94304-1018Telephone: (650) 813-5600Facsimile: (650) [email protected] ofRecord

MARK A. LEMLEY (SBN 155830)Stanford Law SchoolCrown Quadrangle559 Nathan Abbott WayStanford, CA 94305-8610Telephone: (650) 723.2465Facsimile: (650) [email protected]

ATTORNEYS FOR AMICI PROFESSORSAND WRITERS OF LEARNED TREATISES

pa-1163924


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TABLE OF CONTENTSPage

APPLICATION FOR LEAVE TO FILE BRIEF AMICI CURIAE 1I. INTRODUCTION AND SUMMARY OF ARGUMENT 3II. SECTION 16600 EMBODIES CALIFORNIA'SFUNDAMENTAL PUBLIC POLICY AGAINST COVENANTSNOT TO COMPETE 3III. CALIFORNIA HAS NEVER ADOPTED A "PARTIAL" OR"NARROW" RESTRAINT EXCEPTION TO THE STATUTORYRULE 6

A. California Cases Make Clear There IsNo Partial RestraintException 6B. The Ninth Circuit Cases Creating a "NarrowRestraint"Exception Are Ill-Founded and ShouldNot Be Followed 10

IV. THE SO-CALLED "TRADE SECRETEXCEPTION" APPLIESTO INDEPENDENTLY WRONGFUL CONDUCT BUTDOESNOT PERMIT CONTRACTUAL RESTRAINTS ON THEUSEOF PUBLIC INFORMATION OR ON LAWFULCOMPETITION 12V. CALIFORNIA'S BAN ON EMPLOYEE COVENANTSNOT TOCOMPETE SERVES CRITICAL STATE INTERESTS 16


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TABLE OF AUTHORITIESCASES

AdvancedBionics v. Medtronic, Inc.,29 Cal.4th 697,59 P.3d 231 (2002) 4Application Group, Inc. v. Hunter Group, Inc.,61 Cal.AppAth 881 (1998) 4,5Bosley Med. Group v. Abramson,161 Cal.App.3d 284 (1984) 4,5Boughton v. Socony Mobil Oil Co.,231 Cal.App.2d 188 (1964) 10, 11Campbell v. Trustees ofLeland Stanford Jr. Univ.,817 F.2d499 (9thCir. 1987) 10, 11Chamberlain v. Augustine,172 Cal. 285 (1916) 5,6, 7, 8, 10, 11D'Sa v. Playhut, Inc.,85 Cal.AppAth 927 (2000) 5Davis v. Jointless Fire Brick Co.,300 F. 1 (9th Cir. 1924) 10Fortna v. Martin,158 Cal.App.2d 634 (1958) 5Fowler v. Varian Assoc., Inc.,196 Cal.App.3d 34 (1987) 13Frame v. Merrill Lynch,20 Cal.App.3d 668 (1971) 4,5, 8General Commercial Packaging, Inc. v. TPS Package Engineering, Inc.,

126F.3d 1131 (9thCir. 1997) 11Golden State Linen Service, Inc. v. Vidalin,69 Cal.App.3d 1 (1977) 5, 14Gordon Termite Control v. Terrones,

84 Cal.App.3d 176 (1978) 5, 8, 9Gordon v. Landau,49 Ca1.2d 690 (1958) 7, 12, 13Hill Med. Corp. v. Wycoff,86 Cal.AppAth 895 (2001) 4, 5Hollingsworth Solderless Terminal Co. v. Turley,622 F.2d 1324 (9th Cir. 1980) 14

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Hunter v. Superior Court,36 Cal.App.2d 100 (1939) 5International Business Machines Corp. v. Bajorek,191 F.3d 1033 (9th Cir. 1998) 11John F. Matull & Assoc., Inc. v. Cloutier,194 Cal.App.3d 1049 (1987) 14King v. Gerold,109 Cal.App.2d 316 (1952) 10, 11Kolani v. Gluska,64 Cal.AppAth 402 (1998) 5, 13Loral Corp. v. Moyes,174 Cal.App.3d 268 (1985) 14Merrill Lynch v. Ware,414 U.S. 117 (1973) 4Metro Traffic Control, Inc. v. Shadow Traffic Network,22 Cal.AppAth 853 (1994) 5, 14Morey v. Paladini,187 Cal. 727 (1922) 5,6, 7, 10, 11Morris v. Harris,127 Cal.App.2d 476 (1954) 5, 8Muggill v. Reuben H. Donnelley Corp.,62 Cal.2d 239 (1965) 5,8,9, 12, 13ReadylinkHealthcare v. Cotton,126 Cal.AppAth 1006 (2005) 13Scott v. Snelling and Snelling, Inc.,732 F.Supp. 1034 (N.D. Cal. 1990) 4, 13Thompson v. Impaxx, Inc.,113 Cal.AppAth 1425 (2003) 5Thompson v. Impaxx, Inc., supra,

113 Cal.AppAth at 429-430 14Ware v. Merrill Lynch,24 Cal.App.3d 35 (1972) 4Warner and Co. v. Solberg,634 N.W.2d 65 (N.D. 2001) 15Winston Research Corp. v. Minnesota Mining & Mig. Co.,350 F.2d 134 (9th Cir. 1965) 15

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STATUTESCal. Bus. & Prof. Code 16600 passimCal. Civ. Code 3426 (Uniform Trade Secrets Act) 13, 15, 18

MISCELLANEOUSCEB, Trade Secrets Practice in California 2.32 6Restatement (Third) of Unfair Competition 39 15Acs et al., The Knowledge Spillover Theory ofEntrepreneurship23 (Ctr. for Econ. Policy Research, Discussion Paper No. 5326,2005) 20Andersson et al., The Effect ofHRMPractices andR&D Investment onWork Productivity.http://web.mit.edu/ipc/sloan05/HRM_R&D_Andersson_et_al.pdf.. 17Baumol, The Free Market InnovationMachine 121-23 (2002) 19Fallick et al., Job Hopping in Silicon Valley,88 Rev. Econ. Stat. 472 (2006) 17Frischmann & Lemley, Spillovers,107 Colum. L. Rev. 257 (2007) 18, 19Gilson, The Legal Infrastructure ofHigh Technology Industrial

Districts: Silicon Valley, Route 128, and Covenants Not to Compete,74 N.Y.U. L. Rev. 575 (1999) 17,21Gorg & Hijzen, Multinationals and Productivity Spillovers 1-2(Univ. ofNottingham, Research Paper 2004/41,2004), inGlobalisation and Productivity Growth (David Greenaway et al. eds.,forthcoming 2006) 19Harhoff, R&D Spillovers, Technological Proximity, andProductivity Growth -Evidence from German Panel Data,52 Schmalenbach Bus. Rev. 238 (2000) 20Hays, Unfair Competition -AnotherDecade,

51 Cal.L.Rev. 51 14Hyde, Working in Silicon Valley: Economic and Legal Analysis of aHigh-Velocity Labor Market (2003) 16, 17, 18,21Keller &Yeaple, Multinational Enterprises, International Trade, andProductivity Growth: Firm-Level Evidence from the United States26-28(Leverhulme Ctr., Research Paper No. 03, 2003) 19

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Malsberger ed., Covenants Not to Compete: A State-by-State Survey(BNA Books 2d ed. 1996) 21Pooley, Restrictive Employee Covenants in California,4 Santa Clara Compo & High Tech. L.J. 251 (1988) 14Pooley, Trade Secrets, 8.02[2] 13Paul M. Romer, The Origins ofEndogenous Growth,8 J. Econ. Persp. 3 (1994) 18Saxenian, Regional Advantage: Culture and Competition in SiliconValley and Route 128 (1994) 17,21Schmidt, An Empirical Analysis ofthe Effects ofPatent and Secrecy onKnowledge Spillovers 1 (Ctr. for Eur. Econ. Res., Discussion PaperNo. 06-048, 2006) 20Valleta, On the Move: California Employment Law andHigh-TechDevelopment, Fed. Res. Bank of San Francisco Econ. Ltr. No. 2002-24 (Aug. 16, 2002) 17

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APPLICATION FOR LEAVE TO FILE BRIEFAMICICURIAEPursuant to Calif. Rule ofCourt 8.520(f), the undersigned request

leave to file the attached brief as amici curiae in support of respondentRaymond Edwards II. This application is timely made.

Amici are 26 professors and writers of learned treatises in the areasof intellectual property, trade secret law, and innovation policy. Theyinclude law, business, and innovation professors at leading academicinstitutions throughout California and the country. Among them are severalwho have made the effects ofCal. Bus. & Prof. Code 16600 a primaryarea of study for many years. Amici have no personal or financial stake inthe outcome of this case, but as scholars are vitally interested in seeing thatthe rules governing employee mobility encourage rather than retardinnovation. No party or other organization has paid for or authored anypart of this brief. A full list of amici is attached as Appendix A.

This amicus briefwill assist the court in two respects. First, it offersthe consensus ofunbiased leading scholars in the field about the way thelaw of section 16600 has developed. Second, it offers abundant economicand empirical evidence on the effects of the various possible interpretationsof section 16600 offered by the parties to this case. We believe thatadditional briefmg is necessary in this case in order to highlight for theCourt both the history ofhow section 16600 has been interpreted and thedramatic consequences should this Court undo that long-standinginterpretation.

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Accordingly, we respectfully request that the Court accept and filethe attached brief amici curiae.Dated: May 14,2007

Respectfully submitted,JAMES POOLEYMORRISON & FOERSTERLLP

writersames ooley

Att s for amici professorsof learned treatises

By - - + - - - - 1 . - - - - - - ~ ~ - = - ~ ~ . , . . e _ -

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I. INTRODUCTIONAND SUMMARY OFARGUMENTThe Court ofAppeal's interpretation ofCal. Bus. & Prof. Code

16600 was correct as a matter ofboth law and policy, and should beaffirmed.} As a matter of law, the Court ofAppeal correctly read section16600 literally, to bar all covenants not to compete imposed on employees.That reading was consistent with a long line ofCalifornia decisionsinterpreting section 16600. There is not now, and never has been, a"narrow restraint" exception to section 16600 in California. Despite itsname, adopting such an exception would have the effect ofjudiciallyoverruling the statute. And the so-called ''trade secret exception" cannotsupport contractual restraints on lawful competition that does not involvemisappropriation of trade secrets. As a matter ofpolicy, this state's longstanding interpretation of section 16600 serves a vital state interest.California's strong innovation economy depends critically on the freemovement of employees. Judicial creation of an exception that swallowsthe statutory rule would risk serious harm to California's position as aleader in the technology industry.

II. SECTION 16600 EMBODIES CALIFORNIA'SFUNDAMENTAL PUBLIC POLICY AGAINSTCOVENANTS NOT TO COMPETE

Section 16600 voids contracts to the extent they operate to restrainanyone from engaging in a lawful profession, trade or business.2 The

1Amici express no opinion on the second question before the Court.2 The statute contains certain express exceptions for sales of interests

in a corporation or partnership.

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individual's ability to move freely from job to job. See, e.g., ApplicationGroup, supra; Bosley, supra; Chamberlain v. Augustine, 172 Cal. 285, 288289 (1916); Fortna v. Martin, 158 Cal.App.2d 634,638 (1958); Frame,supra; Golden State Linen Service, Inc. v. Vidalin, 69 Cal.App.3d 1, 12(1977); Gordon Termite Control v. Terrones, 84 Cal.App.3d 176, 179(1978); Hill Med. Corp., supra; Hunter v. Superior Court, 36 Cal.App.2d100, 114 (1939); Kolani v. Gluska, 64 Cal.App.4th 402,407 (1998); MetroTraffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 859860 (1994); Morey v. Paladini, 187 Cal. 727, 736 (1922); Morris v. Harris,127 Cal.App.2d 476,478 (1954); Muggill v. Reuben H Donnelley Corp.,62 Cal.2d 239,242-243 (1965). For similar policy-based reasons,California courts have held that an employer commits an act ofwrongfuldischarge when firing an employee for refusing to sign a non-competitionagreement. See, e.g., D'Sa v. Playhut, Inc., 85 Cal.App.4th 927,933(2000) and Thompson v. Impaxx, Inc., 113 Cal.App.4th 1425 (2003).

This Court should reject Andersen's strained argument that arestriction on competition cannot be a "restraint" unless someone is entirelybarred from employment. (Op. Br. at n.4). That is not the ordinary meaningof the term "restraint." Someone can be restrained without abandoning anyaction at all. A leash is a "restraining device" even though it permits somelimited freedom ofmovement, for example. Nor is Andersen's "completeprohibition" the meaning California courts have given the term. Tellingly,none of the voided contracts just cited sought to prevent the individual froman entire field of endeavor, but merely from aspects of it, such as servingcertain customers or competing with a certain company.

The legislature has amended various portions of the statute in 1945,1963 and 2002, and at no time has it seen fit to change or even question its

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interpretation by California courts as a broad prohibition against all fonnsof restraints which are not expressly allowed. Andersen (Op. Br. at 28,Rply. Br. at 13) makes the bizarre argument that this legislative silenceinfers approval of the Ninth Circuit's "narrow restraint exception", whichwe address below, and implicit rejection of the more than 15 Californiaappellate decisions that contain no such exception. But there is no logicalbasis for concluding that the legislature was ignorant of the decisions of ourown state courts, including this Court, and was tuned in instead exclusivelyto the contrary interpretation offered by a handful of federal cases.5

Ill. CALIFORNIA HAS NEVER ADOPTED A"PARTIAL" OR "NARROW" RESTRAINTEXCEPTION TO THE STATUTORYRULESection 16600 is simple and straightforward: to the extent any

contract restrains otherwise lawful competition, it is void. The plainmeaning of "restraint" is reason enough to conclude that the covenantinvolved in this case is unenforceable. But Andersen would have this Courtsanction a "narrow restraint exception" that not only relies on a misreadingof our state's precedents, but that would if adopted swamp the rule in awave of "partial" restraints.

A. California CasesMake Clear There Is NoPartial Restraint Exception

In Chamberlain v. Augustine, supra, 172 Cal. at 289, and again inMorey v. Paladini, supra, 187 Cal. at 738, this Court declared that there isno such thing as a "partial restraint" under the predecessor to section

5 Commentators have noted the conflict. See, e.g., CEB, TradeSecrets Practice in California 2.32, p. 54 ("The federal cases appearinconsistent with California law.").

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16600. In Chamberlain, the covenant barred defendant for three years fromany involvement in a business "similar" to the foundry whose stock he hadsold. The plaintiff argued that the restriction was limited to the states ofCalifornia, Washington, and Oregon; that the defendant could work as a"laborer or molder" in certain designated foundries; and that the covenantwas therefore "only a partial restraint". The argument was easily rejected:"The statute makes no exception in favor of contracts only in partialrestraint of trade." 172 Cal. at 289. InMorey, the alleged agreement waswith a lobster fishery to sell only to a single purchaser in northernCalifornia, Oregon, Washington and Nevada, who in return promised tobuy a large amount of lobsters on a continuing basis. When sued for failureto buy, the purchaser argued the contract was illegal. Observing that "thecontract was one which would result in at least a partial restraint of trade",187 Cal. at 736, this Court agreed it was unlawful, since "[t]he statute(Civ. Code, sec. 1673) makes no exception in favor of contracts only inpartial restraint of trade." Andersen never discusses Morey, andmischaracterizes Chamberlain as involving a "complete restriction on theseller's ability to engage in the foundry business . . . ." (Op. Br. at 22;emphasis in original)6

6Andersen attempts (Op. Br. at 19-20) to contrast this misleadingpicture ofChamberlain with Gordon v. Landau, 49 Cal.2d 690 (1958),which it argues involved a non-compete agreement comparable to the oneimposed here by Andersen. But this ignores the very importantcharacterization by this Court of the agreement in that case: the defendant"merely agreed not to use plaintiffs confidential lists to solicit customersfor himself for a period ofone year following termination of employment".49 Cal.2d at 694. This language was the genesis of the "trade secretexception", discussed infra in section V.

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Clearly, any covenant not to work for a competitor is a "partial"restraint, since the typical employee can ply his or her skills in other ways.7Yet as noted above, California courts have repeatedly held that postemployment non-competition agreements run afoul of section 16600. Inthe leading case ofMuggill v. Reuben H Donnelley Corp., supra, 62 Ca1.2dat 243 (1965), Justice Traynor explained that section 16600 "invalidatesprovisions in employment contracts prohibiting an employee from workingfor a competitor after completion of his employment . . . . " Citing Muggill,as well as Chamberlain, the court in Gordon Termite Control v. Terrones,supra, 84 Cal.App.3d at 179, voided a contract that required an employee topay $50 each time he called on a customer that he worked with at a formeremployer.8 Andersen (Op. Br. at 26-27) waves off these cases as part ofasupposedly anomalous "handful" that in any event "do not support an

7Consider a carpenter barred by contract from competing with ahomebuilding company; he could be employed building sets for a moviestudio. A stockbroker leaving a brokerage (cf. Frame v. Merrill Lynch,supra) can become an investment advisor. These examples (and manymore which come to mind) expose the fallacy of arguing "partial restraint":almost any restraint can be described as substantially less than the whole ofa trade, profession or business.

8 Gordon Termite Control also relied on Morris v. Harris, supra,another case involving post-employment payments for calling onpreviously-serviced customers. Citing Chamberlain, the Morris decisionrejected an argument that the contractwas "only a restriction and not arestraint". 127 Cal.App.2d at 478. Ironically, Andersen uses a similarsemantic argument (prohibition versus restriction) in trying to distinguishMorris. (Op. Br. at 43)

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absolute prohibition on non-competition agreements".9 This observation iscurious, since each of these decisions considered, and found wanting, anon-competition agreement. (Muggill at 240 n.l: payments will terminateif employee "enters any occupation or does any act which . . . is incompetition with . . . Employer"; Gordon Termite: employee agreed "thatshould he terminate . . . he will not call on any accounts called on" whileworking for his former employer.).

Andersen calls for "clarity" in application of section 16600.(Op. Br. at 14). California courts have in fact established a perfectly clearrule: the statute means what it says - that restraints on competition areinvalid. It is Andersen's approach that would generate profounduncertainty. How could one determine what is a "narrow" restraint, otherthan by post hoc conclusions? Indeed, in practice this "exception" wouldcertainly swallow the rule. What would be left to prohibit, if the statuteallowed restraints up to, but some indeterminate amount short of, acomprehensive bar on pursuing a trade? What employee would have theresources to litigate whether the line was drawn properly in his or her case?What employer would readily hire an employee subject to such an uncertainpotential restraint? Where the "partial" or "narrow" restraint inevitablyleads is to some version of the "rule of reason" approach, one which thisstate's legislature soundly rejected over a century ago. See section III,supra. As implemented in a jurisdiction like California with no developedjurisprudence on what are "reasonable" post-employment restraints, this

9 Andersen strangely criticizes Gordon Termite Control for"unquestioningly" following Muggill, which is presumably what courts ofappeal are supposed to do with this Court's precedent.

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new regime would dramatically discourage employee mobility and put atrisk one of the world's most vibrant economies (see section VI infra).

B. The Ninth Circuit Cases Creating a "NarrowRestraint" Exception Are Ill-Founded andShould Not Be Followed

Andersen relies on a trio ofNinth Circuit cases beginning withCampbell v. Trustees ofLeland Stanford Jr. Univ., 817 F.2d 499 (9th Cir.1987). Those cases rely on a strained reading ofCalifornia precedent, andthis Court should not abandon the statutory language and the consistentreading given it by California courts merely to blindly follow cases decidedby a court that was itselfsupposedly following this Court's rule in the fIrstplace. Campbell, while recognizing that California had rejected the rule ofreason in enacting section 16600, chose nonetheless to import such a ruleinto California law under a diffetent name. Campbell's basis for thatdecision was dubious. It relied on a single appellate court opinion,Boughton v. SoconyMobil Oil Co., 231 Cal.App.2d 188 (1964), for theproposition that the statute did not apply "where one is barred frompursuing only a small part of [a] business, trade or profession." 817 F.2d at502. Inexplicably, Campbell did not address this Court's unmistakableholdings to the contrary in Chamberlain and Morey, or its own precedent inDavis v. Jointless Fire Brick Co., 300 F. 1,3 (9th Cir. 1924), which hadexpressly followed Chamberlain in rejecting a "partial restraint" argument.But in any event its reliance on the Boughton dictum lO was misplaced, sinceBoughton had relied for its "small or limited part" exception on King v.

10 Boughton, as the Court ofAppeal noted below, involved arestriction on the use of land, a very specifIc circumstance that onlyobliquely involved section 16600.

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Gerold, 109 Cal.App.2d 316 (1952), a case that even the Campbell courtfound to hold no such thing.11 See Boughton, 231 Cal.App.2d at 192.

From this inauspicious beginning the "narrow restraint exception"took root in Ninth Circuit jurisprudence with an unusual deference to itsquestionable provenance. In General Commercial Packaging, Inc. v. TPSPackage Engineering, Inc., 126 F.3d 1131, 1133 (9th Cir. 1997), the courtcited to the "rule ofCampbell" as if it were the pronouncement of thisCourt, rather than a flawed interpretation of two appellate opinions. Onceagain, the Ninth Circuit inexplicably ignored this Court's rulings inChamberlain and Morey. It did so again in International BusinessMachines Corp. v. Bajorek, 191 F.3d 1033, 1041 (9th Cir. 1998),concluding that Ninth Circuit, not California, precedent bound the court tofollow the "narrow restraint" exception it had created: "We are not free toread California law without deferring to our own precedent on how toconstrue it. . . . Because of the limited scope of the restriction [againstworking for a competitor], we are bound to hold, under Campbell, GeneralCommercial Packaging, and Smith, that the covenant did not violate section16600." 191 F.3d at 1041.

It is past time to address and correct the Ninth Circuit's creation ofthe "narrow restraint exception". It was based originally on unreliableanalysis that ignored this Court's rulings and the Ninth Circuit's ownprecedent, and it grew primarily through circular reasoning and self-

11 King did not involve a restraint against producing "competingmodels" of the licensed product, but only the specific product licensed.

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citation. There is no reason to adopt, and many compelling reasons not toadopt, this jurisprudential aberration.12

IV. THE SO-CALLED "TRADE SECRETEXCEPTION" APPLIES TO INDEPENDENTLYWRONGFUL CONDUCT BUT DOES NOTPERMIT CONTRACTUAL RESTRAINTS ONTHE USE OF PUBLIC INFORMATION OR ONLAWFUL COMPETITION

As noted above, in Gordon v. Landau this Court considered acovenant directed at misuse of a route salesman's account cards, whichcarried detailed information about each customer and their buying habits.The Court noted that the restriction did not prevent lawful competition, butwas directed at use of these "confidential lists to solicit customers" afterleaving employment. This decision was cited inMuggill, creating the socalled ''trade secret exception". 62 Ca1.2d at 242 (section 16600 invalidatesnon-competition agreements "unless they are necessary to protect theemployer's trade secrets").

We say "so-called", because the concept is mis-named. It is not anexception at all, since it only applies to activity, such as misuse of tradesecrets or breach of fiduciary duty, that the lawwould prohibit in theabsence of a contract. It follows that any contract that also prohibits such

12 Andersen argues (Op. Br. at 15-18, Rep. Br. at 7 n.8) that thedecision of the Court ofAppeal below improperly found an exception forcontracts other than those with employees. This is a straw man. Section16600 by its terms is meant to regulate restrictions on individuals' work.Apart from agreements with employers, the only other sort of contract thatcould be implicated is one between organizations that restrains someone'srights to work (for example, an agreement between competitors not to hireeach other's engineers for a period of time). The Court ofAppeal had noreason to venture beyond the fact situation presented to it; but there is alsono reason to apply a different analysis to contracts between entities.

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activity is not a "restraint" of a "lawful profession, trade or business.,,13These cases, in other words, stand for nothing more than thestraightforward proposition that section 16600 doesn't void or preempt theoperation ofCalifornia trade secret law.

The dictum from Muggill, however, has been repeated without muchanalysis in a number of subsequent cases.14 Although the Court ofAppealbelow concluded that the record was insufficiently developed to address the"trade secret exception", 47 Cal.Rptr.3d at 796, its conclusion seems tohave been based on an assumption that proofof an interest in trade secretsmight provide legitimacy to the non-competition covenant. But thatassumption is incorrect. If there is any "trade secret exception" inmodemlaw, it means only that non-disclosure agreements are valid under section16600. See Kolani v. Gluska, 64 Cal.App.4th 402,407 (1998) ("Narrowercontractual restraints on a departing employee, which prohibit him/her fromusing confidential information taken from the former employer, have beenheld to be lawful." [citing Gordon v. Landau, 49 Cal.2d at 694]); ReadylinkHealthcare v. Cotton, 126 Cal.App.4th 1006, 1022 (2005)

13 This does not mean that such contracts are entirely superfluous,since they serve important collateral purposes, such as establishing aconfidential relationship, defining its subject matter, and provingreasonable efforts to protect trade secrets. See Pooley, Trade Secrets, 8.02[2] (Law Journal Press). Moreover, contracts can specify additionalremedies for misappropriation. See also Uniform Trade Secrets Act, Civ.Code 3426.7(b) (contractual remedies not displaced).

14 See, for example, Scott v. Snelling & Snelling, Inc., 732 F.Supp.1034, 1043 (N.D. Cal. 1990) (declining to enforce non-competitionagreement); and Fowler v. Varian Assoc., Inc., 196 Cal.App.3d 34, 43-44(1987) (no non-competition covenant involved).

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("Misappropriation of trade secret information constitutes an exception tosection 16600.,,)].15

That the statute does not void promises of confidentiality should notbe surprising. No California case has ever overthrown a nondisclosureagreement as a restraint of trade; but just as importantly, none has everupheld a non-competition agreement because of a ''trade secret exception."In effect, the "exception" merely reflects the well-accepted notion that "'theemployerwill be able to restrain by contract only that conduct of the formeremployee that would have been subject to judicial restraint under the law ofunfair competition, absent the contract.'"Metro Traffic Control, Inc. v.Shadow Traffic Network, 22 Cal.App.4th 853, 861 (1994) (quoting Hays,Unfair Competition -Another Decade, 51 Cal.L.Rev. 51, 69); see alsoHollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1338 (9thCir. 1980) (same).

In any event, any trade secret "exception" in modem parlance musttake account of the more robust protection afforded secret information

15 Dictum from one case, Loral Corp. v. Moyes, 174 Cal.App.3d268,275 (1985), suggests that "contractual restrictions may have moreimpact in a non-solicitation case than a nondisclosure case." But theanalysis inLoral (and in a case that cited it, John F. Matull & Assoc.,Inc. v. Cloutier, 194 Cal.App.3d 1049 (1987)) was flawed; see Pooley,Restrictive Employee Covenants in California, 4 Santa Clara Compo &High Tech. LJ. 251,264-276 (1988). A more recent case, Thompson v.Impaxx, Inc., supra, 113 Cal.App.4th at 429-430, reaffirms thatnonsolicitation covenants are enforceable only to the extent that misuse oftrade secrets is involved. Andersen (Op. Br. at 24) criticizes the Court ofAppeal for not considering Loral, or dictum from another nonsolicitationcase, Golden State Linen Servo v. Vidalin, 69 Cal.App.3d 1,9 (1977); butthere was no particular reason for the court to do so, since Edwards had notchallenged that part of the agreement. 47 Cal.Rptr.3d at 797 n.4.

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under the Uniform Trade Secrets Act, Civil Code 3426. Beforeenactment of that statute, California common law on trade secrets wasbased largely on the Restatement (First) ofTorts, which defined tradesecrets relatively narrowly, excluding "emphemeral" information such asunpublished bids, and "negative" information such as the results ofunsuccessful experiments.16 Even if one might have argued the need forsupplemental contractual protection of information when trade secret lawwas narrower, such arguments have no force at all today, when theextremely broad statutory definition of a trade secret covers virtually allnonpublic information that a business may want to protect.17 The importantconclusion from this development is that there is no justification forseeking contractual protection for information that does not qualify as atrade secret under the UTSA, since such information is undeserving of anyprotection at all.

The trade secret "exception," in short, cannot be used to justify anon-competition covenant that restricts an employee from competing in away that would not use a trade secret; the "exception" merely explains whynon-disclosure agreements are valid when used to protect real trade secrets.

16 See Restatement (Third) ofUnfair Competition 39, comment d.Cf. Winston Research Corp. v. Minnesota Mining & MIg. Co., 350 F.2d134, 144 (9th Cir. 1965) (in pre-UTSA decision, held information aboutproblems with company's machine cannot qualify as trade secret).

17 See Warner and Co. v. Solberg, 634 N.W.2d 65, 72 (N.D. 2001)(applying North Dakota statute similar to section 16600, and in reference toCalifornia decisional law, finding that since enactment of the UTSA the"need to create a judicial exception . . . may now be questioned.").

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v. CALIFORNIA'S BAN ON EMPLOYEECOVENANTS NOT TO COMPETE SERVESCRITICAL STATE INTERESTSReading Andersen's briefs, one might have the impression that

section 16600 is a poorly-drafted accident that was never intended to meanwhat it says. Nothing could be further from the truth. California's longstanding ban on employee covenants not to compete is a centerpiece ofstate innovation policy, and it is perhaps the most important reason whyCalifornia has enjoyed its leading position in the technology industries overthe past 25 years.

Most states other than California enforce employee covenants not tocompete. The fact that California does not enforce them has led to whatAlan Hyde has called a "high-velocity labor market": one in whichemployees can and do change jobs with some frequency. Alan Hyde,Working in Silicon Valley: Economic and Legal Analysis of a HighVelocity Labor Market (2003). The ability to leave ajob and continue towork in one's chosen profession - something taken for granted inCalifornia but subject to significant restrictions elsewhere - obviouslybenefits employees, who are not bound to bad jobs by fear that they will beunemployable or at least underemployed if they choose to leave. But lessobviously, it also benefits employers and the economy as a whole. Whileemployers whose employees want to leave may have a short-term, selfishinterest in making it hard for them to do so, those same employers benefitin the long run by being able to hire new employees away from competitorswithout fear of legal sanction. And perhaps most important, California'srule protecting the freedom of departing employees to compete encouragesemployees who think they can build a better mousetrap (or a bettercomputer chip or search engine) to start a new company to do just that.

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Those start-ups have contributed enormously to the Californiaeconomy, to such an extent that regions all over the world have sought toemulate Silicon Valley. But as a number of legal and economic studieshave shown, those efforts to be like Silicon Valley have failed. AnnaleeSaxenian, Regional Advantage: Culture and Competition in Silicon Valleyand Route 128 (1994). Notably, work by legal scholars and social scientistssuggest that Silicon Valley has succeeded where others have failed insignificant part because ofCalifornia's rule prohibiting employeecovenants not to compete, which led to high rates of employee mobility.See, e.g., Saxenian, supra, at 34-35, 161-68 (documenting the high rates ofemployee mobility in Silicon Valley, and attributing the success ofinnovation in the Valley in part to that difference); Ronald J. Gilson, TheLegal Infrastructure ofHigh Technology Industrial Districts: SiliconValley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. Rev. 575,577-78 (1999); Bruce C. Fallick et aI., Job Hopping in Silicon Valley,88 Rev. Econ. Stat. 472 (2006) (providing empirical support for theSaxenian-Gilson argument); Fredrik Andersson et aI., The Effect ofHRMPractices andR&D Investment on Work Productivity.http://web.mit.edu/ipc/sloan05/HRM_R&D_Andersson_et_aI.pdf; RobValleta, On the Move: California Employment Law andHigh-TechDevelopment, Fed. Res. Bank of San Francisco Econ. Ltr. No. 2002-24(Aug. 16, 2002).

The explanation is straightforward: start-ups drive new innovation.The biggest source of start-ups is employees who depart from existingcompanies. See Hyde, supra, at 31-32 (reporting a study ofhard-drivemanufacturing, in which departing-employee start-ups accounted for over99% of start-up revenue). Those new companies grow, employing workers,

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Frischmann & Mark A. Lemley, Spillovers, 107 Colum. L. Rev. 257(2007).

Third, the benefits of the "spillovers" of ideas that come withemployee mobility are large enough to outweigh any harm to formeremployers, and indeed so great that even the fortner employers themselvesbenefit from California's high-velocity labor market. A wealth ofeconomic evidence teaches us that these spillovers are good for society.There is no question that inventions create significant social benefitsbeyond those captured in a market transaction. Statistical evidencerepeatedly demonstrates that innovators capture only a small proportion ofthe social value of their inventions. See, e.g., Frischmann& Lemley,supra, at fn. 5 (collecting the dozens of economic studies proving thispoint). These spillovers benefit not only consumers but also third parties,including competitors and potential competitors. Employees at aninnovative company acquire knowledge about innovative products andprocesses that they can put to use elsewhere.18 The public as a whole alsobenefits from new sources of innovative products. See William J. Baumol,The Free Market InnovationMachine 121 ..23 (2002).

18 See, e.g., Holger Gorg & Alexander Hijzen, Multinationals andProductivity Spillovers 1-2 (Univ. ofNottingham, Research Paper 2004/41,2004), in Globalisation and Productivity Growth (David Greenaway et al.eds., forthcoming 2006) (noting ways in which spillovers to competitorsoccur); W. Keller & S. Yeaple, Multinational Enterprises, InternationalTrade, and Productivity Growth: Firm-Level Evidence from the UnitedStates 26-28 (Leverhulme Ctr., Research PaperNo. 03,2003), available athttp://www.nottingham.ac.uk leconomics/leverhulme/research-papers/03_03.pdf (documenting their significance).

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Far from interfering with incentives, empirical evidence suggeststhat these spillovers actually drive further innovation. Industries withsignificant spillovers generally experience more and faster innovation thanindustries with fewer spillovers. 19 Dietmar Harhofffmds empiricalevidence that firms in high-technology industries (the most innovationintensive ones) are likely to increase rather than decrease their investmentin research and development in the face of significant intra-industryspillovers. Harhoff, supra, at 258. Acs et al. argue that this is because thespillovers are creating opportunities to be exploited by entrepreneurs suchas departing employees. Zoltan J. Acs et aI., The Knowledge SpilloverTheory ofEntrepreneurship 23 (Ctr. for Econ. Policy Research, DiscussionPaper No. 5326, 2005), available athttp://papers.ssm.com/so13/papers.cfm?abstract id=873614. But theseentrepreneurs aren't engaging in incentive-draining free riding; rather, theyare part of a virtuous circle because they are in tum creating newknowledge spillovers that support still more entrepreneurial activity.

19 See, e.g., Dietmar Harhoff, R&D Spillovers, TechnologicalProximity, andProductivity Growth - Evidence from German Panel Data,52 Schmalenbach Bus. Rev. 238, 258 (2000) ("High-technology firms reactmore sensitively to spillovers in terms of their R&D spending, and theirdirect marginal productivity gain from spillovers (in excess to the effectfrom enhanced R&D spending) is considerably larger than the respectivegain for less technology-oriented firms."). Indeed, the positive relationshipis so strong that some economists use spillovers as a measure of innovation!See Tobias Schmidt, An Empirical Analysis ofthe Effects ofPatent andSecrecy on Knowledge Spillovers 1 (Ctr. for Eur. Econ. Res., DiscussionPaper No. 06-048, 2006), available at ftp://ftp.zew.de/pub/zew-docs/dp/dp06048.pdf.

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One need not rely only on economic theory or empirical studies toexplain why a free labor market is a good thing for innovation incentives.History teaches this lesson as well. The computer industry is an obviousexample. Both Annalee Saxenian and Ron Gilson have shown thatspillovers drove innovation in that industry: Silicon Valley thrivedwhileBoston's Route 128 withered in the 1980s and 1990s in significant partbecause employees and knowledge moved freely to new companies inSilicon Valley, but not in Boston. See Saxenian, supra, at 161-68; Gilson,supra, at 577-78. And as Alan Hyde puts it, no shortage of innovationresulted:

In California, employees are normally free tochange jobs without a lawsuit alleging . . .breach of a covenant not to compete. There isno evidence of any social harm from this. Inparticular, there is no evidence that firms lackincentives to invest in the production ofinformation.

Hyde, supra, at 43.The fact that numerous social science studies have shown that

California's free labor movement policy drives technological innovationprovides a strong policy reason for the Court to refrain from overturning thelegislature's judgment. The presence of even so-called "reasonable"restraints on employee mobility, as exist inMassachusetts and other easternstates, interferes with the free development ofvital new industries. Nordoes calling those restraints "narrow" solve the problem. States likeMontana and Oklahoma, in which the judiciary has rewritten freeemployee-mobility legislation to permit such "narrow" restraints, seeBrian M. Malsberger ed., Covenants Not to Compete: A State-by-StateSurvey (BNA Books 2d ed. 1996), hardly have the sort ofvibrant

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technology economy California should wish to emulate. California shouldnot risk killing the goose that laid the golden egg by undoing thelongstanding policy against enforcing employee covenants not to compete.Dated: May 14, 2007 Respectfully submitted,

JAMES POOLEYMORRISON & FOERSTERLLP

Ja es ooleyAtto s for amici professorsof learned treatises

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Appendix A: List of Signatories20

Professor John R. AllisonSpence Centennial ProfessorGraduate School ofBusinessUniversity ofTexas at AustinProfessor John R. BartonGeorge E. Osborne Professor EmeritusStanford Law SchoolProfessor Lorelei R. de LarenaFlorida State University College ofLawProfessor Rochelle Cooper DreyfussPauline Newman ProfessorNYU School ofLawProfessor Sheri J. EngelkenGonzaga University School ofLawProfessor William T. GallagherGolden Gate University School ofLawProfessor Shubha GhoshSMU Dedman School ofLawProfessor Ronald J. GilsonMeyers Professor ofLaw and BusinessStanford Law SchoolProfessor Eric GoldmanSanta Clara University School ofLaw

20 Amici are participating in this briefin their personal capacity.Institutions are listed for identification purposes only.

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Professor Alan HydeVisiting Professor, Cornell Law SchoolSidney Reitman ScholarRutgers University School ofLawProfessor Mark A. LemleyWilliam H. Neukom ProfessorStanford Law SchoolProfessor Lawrence LessigC. Wendell & Edith M. Carlsmith ProfessorStanford Law SchoolProfessor Gillian LesterBoalt Hall School ofLawUniversity ofCalifornia at BerkeleyProfessor David LevineCharlotte School ofLawProfessor Michael J. MadisonUniversity ofPittsburgh School ofLawProfessor StephenMelohnSuffolk University Law SchoolProfessorMichael A. MirelesUniversity ofDenver College ofLawProfessor Viva R. MoffatUniversity ofDenver College ofLawProfessor Tyler T. OchoaSanta Clara University School ofLawProfessor Sean O'ConnorVisiting Professor, Boalt Hall School ofLaw, UC BerkeleyUniversity ofWashington School ofLawJames PooleyLecturer in Law, Boalt Hall School ofLawUniversity ofCalifornia at BerkeleyAuthor, Trade Secrets (Law Journal Press)

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ProfessorMichael RischWest Virginia University College ofLawProfessor Joshua D. SarnoffGlushko-Samuelson Intellectual Property Law ClinicWashington College ofLawAmerican UniversityProfessor Kurt M. SaundersChair, Department ofBusiness LawCalifornia State University - NorthridgeDean AnnaLee SaxenianSchool of InformationUniversity ofCalifornia at BerkeleyProfessor Jennifer M. UrbanDirector, Intellectual Property and Technology ClinicUniversity of Southern California School ofLaw

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CERTIFICATE OF COMPLIANCEI certify that this brief complies with the type-volume limitation of

California Rule ofCourt, Rule 8.204.Exclusive of the exempted portions in California Rules ofCourt,

Rule 8.204(c), the brief contains 6,270 words.

Dated: May 14, 2007 JAMES POOLEYMORRISON & FOERSTERLLP

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WAYNE SCOTT FLICKLatham& Watkins633 W 5th St #4000Los Angeles, CA

KRISTINE L. WILKESLatham & Watkins701 B St #2100San Diego, CARICHARD A. LOVEAttorney at Law11601 Wilshire Blvd #2000Los Angeles, CAMARC JOSEPH POSTERGreines Martin et al LLP5700 Wilshire Blvd #375Los Angeles, CAClerk for theHonorable AndriaK. RicheyLos Angeles Superior CourtIII North Hill StreetLos Angeles, CA 90012Office of the ClerkCourt ofAppealSecond Appellate District,Division Three300 South Spring StreetSecond Floor, North TowerLos Angeles, CA 90013-1233

Attorneysfor Defendant andRespondentARTHURANDERSEN,LLPAttorneysfor Defendant andRespondentARTHUR ANDERSEN,LLP

Attorneys for PlaintiffandAppellantRAYMONDEDWARDS II

Attorneysfor PlaintiffandAppellantRAYMONDEDWARDS II

I declare under penalty ofperjury that the foregoing is true and correct.Executed at Palo Alto, California, this 14th day ofMay, 2007.

Frances L. M. Sagapolu(typed)

A(signature)

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