Compliance With State Regulations Provides Protection Against Consumer Claim

Case: Yabsley v. Cingular Wireless, LLC, Case No. B198827 (Cal. Ct. App. 8/18/2008)

The One Sentence Summary: California Court of Appeal holds that compliance with California Regulations relating to retailer’s tax obligations provides safe harbor against claims by consumer for unfair business practices and false advertising under Business and Professions Code sections 17200 and 17500.


What They Were Fighting About: Defendant Cingular Wireless provided a half price discount for the purchase of a cellular phone if the customer also enrolled in a calling plan package. California Regulation 1585 requires that the sales tax be computed based on the full price of the phone, and the seller can pass on the full tax to the customer if it chooses. Plaintiff alleged that when he purchased a phone and calling plan package from Cingular, Cingular calculated Plaintiff’s tax based on the full price of the phone without informing him that it was doing so. Plaintiff brought a putative class action against Cingular for unfair business practices in violation of California Business and Professions Code section 17200 and misleading advertising in violation of California Business and Professions Code section 17500 arising out Cingular’s failure to disclose the sales tax charged.

Court Holdings:

• Although California law prohibits “any unlawful, unfair or fraudulent business act or practice,” it does not apply where specific legislation provides a “safe harbor” for the conduct at issue.
• “California Regulation 1585 has the ‘force and effect’ and the ‘dignity’ of a statute. Therefore, it may, and does, provide a safe harbor to Cingular.”
• No law required Cingular to disclose the amount of the sales tax charged on a sale prior to the sale. Cingular’s disclosure of the amount of the sale tax in the sale invoice was in compliance with the law because Plaintiff had a right to refuse to enter into the contract after seeing the invoice.
  
  

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Even Reasonable and Narrow Non-Compete Agreements Are Barred by California Statute

Employment contracts with non-competition clauses are common outside of California, but a California statute, section 16600 of the California Business and Professions Code, prohibits non-compete contracts outside of a few statutory exceptions. In a decision issued on August 7, 2008, Edwards v. Arthur Anderson, No. S147190, the California Supreme Court held that section 16600 prohibits non-competition contracts even if the non-compete clause is reasonable or imposes only a “narrow restraint.” The Court further held that the employer had engaged in a wrongful act by requiring the employee to sign a release of claims under the non-competition contract.

Background:

Section 16600 provides that

“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Statutory exceptions to section 16600 allow non-compete contracts in certain circumstances, including in connection with the sale of goodwill of a business (§ 16601) and the dissolution of a partnership (§ 16602) or limited liability corporation (§ 16602.5).

In Edwards, the plaintiff Edwards had signed a non-competition agreement as an employee of Arthur Anderson. The agreement barred Edwards from serving within 18 months any Anderson clients with whom Edwards had worked, and barred solicitation of clients of Anderson’s Los Angeles office. After Anderson became embroiled in the Enron scandal, HSBC sought to hire a group of employees including Edwards. HSBC and Anderson required the moving employees to sign a “Termination of Non-Compete Agreement” which released “any and all” claims against Anderson. Edwards refused to sign the termination agreement because he did not want to release indemnity claims against Anderson, and was therefore not hired by HSBC. Edwards then sued Anderson and HSBC for claims including interference with prospective economic advantage. Edwards lost in the trial court against Anderson but won at the California Court of Appeal (click here for a discussion of the lower court decision). The California Supreme Court then took the case.

California Supreme Court Holdings:

• The first question before the California Supreme Court was whether Anderson’s enforcement of the non-competition agreement (by forcing Edwards to sign an agreement terminating it) was a wrongful act. The Court held that enforcing the non-competition agreement was illegal under section 16600 and enforcing it was a wrongful act that could lead to liability for interference with prospective economic advantage. The Court noted that

  section 16600 reflects “a settled legislative policy in favor of open competition and employee mobility, . . . [it] ensures that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice [and it] protects the important legal right of persons to engage in businesses and occupations of their choosing.”



• In light of the broad statutory language of section 16600 and the limited statutory exceptions, the Court rejected decisions of federal courts which had ruled that section 16600 allowed “reasonable” non-compete contracts that imposed only a “narrow restraint” on competition. The Court stated “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.”


• In a second part of the decision unrelated to the non-competition agreement issue, the Court also held that the release sought by Anderson as the employer for “any and all” claims was not unlawful because it could not be interpreted to release non-waivable employee indemnity rights under California Labor Code section 2802(a).
  

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