WSGR ALERT

Recent Cases Shed Light on the Status of Employee Non-Solicitation Agreements in California

January 30, 2019

Two recent cases have found that employee non-solicitation agreements, at least in the form many companies currently use, are unlawful in California. In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018) (AMN), as well as Barker v. Insight Global, LLC , Case No. 16-cv-07186-BLF, 2019 U.S. Dist. LEXIS 6523 (N.D. Cal. Jan. 11, 2019) (Barker), the courts determined that employee non-solicitation agreements (employee non-solicits) are unlawful and cannot be enforced. Because thousands of California employers use such employee non-solicits, they should be aware of these decisions. Out-of-state employers seeking to enforce such employee non-solicits should similarly be aware of these developments, as the California statute at issue represents a fundamental public policy of the state, which in some instances may override the law of other jurisdictions.

California’s Preexisting Legal Landscape Regarding Employee Non-Solicits

Courts and Practitioners Read Loral as Supporting Employee Non-Solicits

For decades, California courts have relied on Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985), to support the enforceability of employee non-solicits. In Loral, a company sued a former executive after he offered employment to two key employees of the former employer. Loral sued the former executive over his breach of an agreement “not to disrupt, damage, impair or interfere with his former employer by ‘raiding’ its work staff.” Id. at 275. While the Loral court noted California’s “basic rule” that contracts precluding a former employee from obtaining new employment with a competitor are invalid under California Business & Professions Code Section 16600 (Section 16600), it nevertheless concluded that the non-solicit at issue was lawful and enforceable because it did “not appear to be any more of a significant restraint on his engaging in his profession, trade or business than a restraint on solicitation of customers or on disclosure of confidential information.” Id. at 279. The court determined that the employee non-solicit was not a restraint on trade because the company’s employees were free to seek employment with a competitor and those employees only lost the option of being first contacted by the defendant former employee.

Edwards v. Arthur Andersen LLP Creates Uncertainty

A decade ago, in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) (Edwards), the California Supreme Court ruled that an agreement limiting a person’s ability to work for or solicit a former employer’s customers is expressly prohibited by Section 16600. In affirming that statute’s “plain meaning” and “strong public policy” that an employer cannot restrain a former employee from engaging in his or her profession, trade, or business, the court expressly rejected the “narrow-restraint” exception that had been used by some courts to find restraints legal and enforceable. Id. at 950. Specifically, it concluded that the “narrow-restraint” exception simply could not be reconciled with the unambiguous language of Section 16600, and it made clear that except for the recognized statutory exceptions for the sale or dissolution of corporations, partnerships, or limited liability corporations, California law prohibits all noncompetition and customer non-solicitation agreements, even if the agreement only restricts the ability to work for a limited number of companies. Id. at 949-50.

Significantly, Edwards did not address the employee non-solicit originally at issue in the case because the plaintiff employee (a former Arthur Andersen employee) did not dispute that portion of his agreement prohibiting him from recruiting Arthur Andersen's employees. As a result, since Edwards, questions have existed, and challenges have been raised, as to whether Loral’s analysis regarding employee non-solicits remained good law. Without clear authority from California’s appellate courts directly overturning Loral, some trial courts have felt obligated to follow its holding that employee non-solicits were lawful under Section 16600.

AMN and Barker Reject Loral, Instead Following Edwards

In AMN, a company sued some of its former employees for, among other things, breaching a restriction in their AMN confidentiality agreement prohibiting them from “directly or indirectly soliciting or inducing, or causing others to solicit or induce, any employee of [the Company or any Company Affiliate to leave the service of the Company or such Company Affiliate],” for a period of one year [or 18 months] following the end of their employment. 28 Cal. App. 5th at 951. AMN, the former employer, also accused the employees’ new employer (Aya) of engaging in interference with contract, aiding and abetting, and unfair competition. In response, Aya, the competitor company, and the individual defendants sought a ruling declaring that the non-solicitation agreement was unlawful and that AMN should be enjoined from enforcing it. The lower court ruled in favor of Aya and the former employees.

The California Court of Appeal upheld the lower court’s summary judgment ruling in favor of Aya and the individual defendants. The AMN court “independently conclude[d]” that the employee non-solicitation provision signed by the former employees was void under Section 16600. Id. at 928.The court’s decision appeared to go to great lengths to point out that the individuals affected by non-solicit were recruiters that would be “clearly restrained” from practicing with Aya their chosen profession (recruiting travel nurses). Id. at 936. Perhaps of greater consequence, however, the court specifically stated that it believed that Loral’s use of a “reasonableness standard” in analyzing the non-solicitation agreement at issue conflicted with the California Supreme Court’s decision in Edwards, which prevents a former employer from restraining a former employee from engaging in his or her “‘lawful profession, trade, or business of any kind.’” Id. at 938, quoting Edwards, 44 Cal. 4th at 945. For that reason, the AMN court stated: “We thus doubt the continuing viability of [Loral] post-Edwards.” Id. at 939.

In Barker, a California federal district court reached the same result. There, a former employee brought a class action against his former employer for including an allegedly unlawful employee non-solicitation agreement. He sought a declaration that the employee non-solicit was unlawful, and also alleged unfair competition (and other claims not relevant here). The non-solicit at issue there restricted former Insight Global employees from soliciting employees for one year following termination of employment.

While the trial judge in Barker originally dismissed the plaintiff’s declaratory relief and unfair competition claims, and found that the employee non-solicit was valid because Loral was still good law, following the AMN decision the judge reconsidered her ruling and reversed herself. The court stated: “Having considered the AMN decision and reviewed Loral and Edwards, the Court is convinced by the reasoning in AMN that California law is properly interpreted post-Edwards to invalidate employee nonsolicitation provisions.” 2019 U.S. Dist. LEXIS 6523, at *8. It found AMN’s reasoning persuasive, and, of note, did not believe that AMN’s central holding (that the employee non-solicitation agreement was unlawful under Section 16600) was limited in any way by the fact that AMN dealt with recruiters whose professions would be limited by the non-solicitation restraint.

Conclusion

WSGR has long-wondered whether Loral's days are numbered, and whether an employee non-solicit would fail under Section 16600 in light of the 2008 Edwards decision (unless it falls within the Section 16601 or other statutory exceptions). See WSGR Alert. It appears that, for the typical employee non-solicit, that day has arrived. Because the use of an “illegal” employee non-solicit may give rise to a claim for unfair competition or other tort claims such as tortious interference, California employers should consider these cases carefully in view of their use of employee non-solicits as currently drafted and utilized in confidentiality agreements, releases, etc. Consulting counsel regarding these matters is recommended.

Wilson Sonsini Goodrich & Rosati actively is following developments around the country with respect to restrictive covenants, including employee non-solicits, and the firm is available to assist companies, employees, newly formed businesses, and investors with every aspect of employment and trade secret litigation and counseling. For more information, please contact  Rico RosalesMarina Tsatalis, Charles T. Graves, Jason Storck, Rebecca Stuart, or another member of the firm's employment and trade secrets litigation practice.