New Court of Appeal decision on employee non-solicitation agreements

AMN Healthcare, Inc. v. Aya Healthcare Servs.

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California law may be turning against enforceability of employee non-solicitation clauses

Post-employment non-compete agreements (including bans on customer solicitation) are generally void in California under Section 16600 of the California Business and Professions Code (Cal. Bus. & Prof. Code §§ 16600 to 16607 and Edwards v. Arthur Andersen, LLP, 44 Cal. 4th 937 (2008)). In Edwards, the California Supreme Court ruled that customer non-solicitation provisions, no matter how “reasonably” or narrowly-tailored, are unlawful. The only exceptions are non-compete agreements that fall within one of the narrow statutory exemptions, all of which pertain to the sale of a business and its goodwill or the dissolution of a partnership or LLC. Therefore, they usually will not be upheld against a former employee who was not a partner or owner that received goodwill for selling the business. Some employers have incorporated limits on the use of their trade secrets and confidential information in future work.

However, the California Supreme Court has not yet considered the enforceability of employee non-solicitation provisions, in which a departing employee is forbidden to “solicit” the company’s existing employees to work for the departing company’s new employer for a certain period of time. Also referred to as “no-raiding” provisions, these have seemingly met with California courts’ approval. Employers face challenges when utilizing non-solicitation clauses because there is no definitive ruling on their enforceability. In Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985), an appellate court enforced a non-solicitation provision in a termination agreement with an executive officer, that prohibited the executive, then or in the future, from disrupting, damaging, impairing, or interfering with the employer's business by "interfering with or raiding its employees.” Loral held that the provision was more of a "noninterference agreement" that did not violate California law against non-competes. The provision at issue in Loral did not contain a time limitation but the appellate court interpreted it to be limited to one year in duration from the time the termination agreement was executed. Little has changed in the past three decades on employee non-solicitation, despite Edwards. Now, however, a direct challenge to Loral may encourage the Supreme Court to weigh in.

Fourth District Court of Appeal’s decision on Employee Non-Solicitation Agreements in AMN Healthcare, Inc. v. Aya Healthcare Servs.

On November 1, 2018, The Fourth District Court of Appeal in AMN Healthcare held that a post-termination employee non-solicitation provision for one year or longer was void under Section 16660, was an unlawful restraint on trade because it prohibited the employees from being able to practice their chosen profession.

Plaintiff AMN Healthcare, Inc. (AMN) appealed a judgment in favor of Aya Healthcare, Inc. (Aya) and individual defendants who were former travel nurse recruiters of AMN that had joined Aya at different times (individual defendants), and an injunction preventing AMN from enforcing its non-solicitation of employee provision against individual defendants and its other former employees. AMN and Aya are competitors in the business of providing travel nurses to medical care facilities.

The provision at issue provided that, for at least one year after terminating their employment with AMN, former AMN employees “shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of [AMN] to leave the service of [AMN].” The court examined whether the clause violates the plain language of Section 16600 by imposing a restraint on one’s ability to “engag[e] in a lawful profession, trade, or business of any kind …” instead of the reasonableness standard used in earlier cases. Because the individual defendants were recruiters in the business of recruiting and placing travel nurses temporarily in medical facilities, the court determined that the provision restrained them from engaging in their chosen profession.

The appellate court found the factual circumstances of AMN distinguishable from the earlier Loral precedent, because the AMN provision restrained the recruiters from practicing their profession of recruiting, while the Loral executive was not in the profession of recruiting. Notably, the court went so far as to question the validity of the reasonableness standard following the Edwards decision, rather than base its decision to depart from Loral based solely on the factual distinction that it involved the recruiting industry.

The AMN Healthcare decision may usher in hostility toward employee non-solicitation agreements. Therefore, employers are strongly advised to have employment counsel review their handbooks and key employee agreements to examine whether their existing provisions contain employee non-solicitation language, and consider modifying them in light of this development.