United States: Recent State And Federal Cases Imply Changes In California Enforcement Of Employee Nonsolicit Clauses

Two recent cases have determined the use of employee nonsolicitation clauses in employment agreements to be unlawful in the state of California. Any employer with California employees, including out-of-state employers, should take note of these decisions and consider removing nonsolicit clauses from California employment agreements.

California’s Aversion to Restrictive Covenants

The state of California has a long history of aversion to restrictions that limit workers’ rights to engage in any lawful profession. California Business and Professions Code § 16600 (which was derived from former Civil Code section 1673, enacted in 1872) provides:

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.

The exceptions noted in the relevant chapter are restrictions given in connection with the sale of a business and associated goodwill, dissolution of a partnership, or dissolution of a limited liability company. Thus, it has long been the law in California that certain restrictions on former employees’ rights to work for competitors are void and against public policy. The concept that employees who subsequently go to work for competitors will inevitably use or disclose trade secrets learned at the prior employment (the “inevitable disclosure doctrine”) has been expressly rejected by California courts. Employee mobility is paramount, and, in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), the California Supreme Court held that former employees are entitled to solicit the clients of their former employers, provided that they do not use the former employer’s trade secrets or confidential information in so doing. Until recently, not much attention was focused on whether employers could restrict former employees from soliciting or hiring away other employees.

Employee Solicitation in the Spotlight

In Loral Corp. v. Moyes, 174 Cal.App.3d 269 (1985), a California Court of Appeal declined to declare void and unenforceable a restriction in an employee agreement that read, in relevant part:

[Y]ou will not now or in the future disrupt, damage, impair or interfere with the business of Conic Corporation, or its TerraCom Division whether by way of interfering with or raiding its employees, disrupting its relationships with customers, agents, representatives or vendors or otherwise. You are not however, restricted from being employed by or engaged in a competing business.  

The Loral court did not specifically rule that clauses prohibiting employees from later soliciting their co-workers were enforceable. It merely held, upon the facts of that case, that the clause in question was not a clear and unenforceable restraint on trade.

Two recent cases, however, have placed the issue of restrictions on employee solicitation squarely in the limelight. In AMN Healthcare, Inc. v. Aya HealthCare Services, Inc., 28 Cal.App.5th 923 (2018), the California Court of Appeal questioned the validity of a healthcare company’s contractual provision that prohibited its employees from recruiting other AMN employees for a period of 18 months after departing AMN. Part of AMN’s business involved providing traveling nurses. It employed recruiters to locate and hire traveling nurses. An AMN recruiter left and went to a competitor and solicited two traveling nurses who were then employed by AMN to leave and work for the competitor. AMN sued its former recruiter and the competitor. The trial court granted summary judgment for the defendants, holding that the employee nonsolicit provision was an unlawful restraint on trade, enjoined the former employer, AMN, from enforcing the employee nonsolicit provision, and awarded the defendants their attorneys’ fees. AMN appealed and the California Court of Appeal affirmed, holding that the broadly worded employee nonsolicit clause was an unlawful restraint on trade prohibited under California Business and Professions Code Section 16600. The Court of Appeal relied upon the California Supreme Court’s decision in Edwards, which expansively refused to enforce noncompete agreements preventing employees from competing with former employers or soliciting their former employer’s clients (without using trade secrets). The Court of Appeal noted that employee nonsolicit clause at issue unlawfully restrained the recruiters from engaging in their trade—which was, by its nature, solicitation—even in a narrow or limited way.

In the immediate aftermath of AMN Healthcare, some commentators questioned whether the decision might subsequently be limited to its facts, i.e., the particular circumstances of the recruiting industry, which raised additional noncompetition implications. This ambiguity took a step toward clarity in Barker v. Insight Global, LLC, Case No. 16-cv-07186-BLF, 2019 U.S. Dist. LEXIS 6523 (N.D. Cal. Jan. 11, 2019), when a California federal district court came to the same conclusion, under different facts. The nonsolicit clause at issue in Barker restricted employees from soliciting co-workers for one year following the termination of employment. A former employee asserted claims against the former employer for unfair business practices and sought a declaration that the employee nonsolicit clause was unlawful and void. In Barker, Judge Beth Labson Freeman reversed her own prior ruling, “convinced by the reasoning in AMN that California law is properly interpreted post-Edwards to invalidate employee Nonsolicitation provisions.”

Implications for Employers

These two recent cases reflect a clear trend in California courts’ approaches to employee nonsolicit clauses in employment agreements, which is to strongly disfavor them. In past years, when litigation was primarily focused on true noncompetes and solicitation of clients and customers, not much attention was paid to employee nonsolicitation clauses. In light of the recent opinions of both a California state and a federal court applying California law, employers should promptly revisit the inclusion of such clauses in employment agreements. Neither case emanated from the California Supreme Court. Until such time as the California Supreme Court weighs in on the issue, or additional California Courts of Appeal follow AMN, employers who have nonsolicitation agreements with their California employees should consult counsel to discuss whether and to what extent to continue using such provisions, though there is no guarantee that any such provision will be enforced in light of the recent AMN and Barker decisions.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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