California Courts Target Enforceability of Nonsolicitation Agreements

 

By Matthew T. McLaughlin and Conor McNamara © Nixon Peabody March 12, 2019
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Two recent court rulings have challenged the long-held view that reasonable post-employment employee nonsolicitation provisions—unlike noncompetition and customer nonsolicitation provisions—are enforceable in California. While it remains to be seen whether other California courts will adopt the rationale of these recent rulings, employers should nevertheless assess the continued use of employee nonsolicitation clauses in their employee agreements.

The Decisions

For decades, employers have relied on the California Court of Appeal's 1985 decision in Loral Corp. v. Moyes, in which the court found that the employee nonsolicitation provision at issue was not void under California Business & Professions Code Section 16600 as it only "slightly affected" the former employee, to support the enforcement of nonsolicitation-of-employee provisions under California law.

However, late last year, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., a California Court of Appeal found that the employee nonsolicitation provision at issue violated Section 16600 because it constituted an improper restraint on the former employees' ability to engage in their chosen profession, trade or business.

In AMN, the employees at issue were employed as recruiters whose job was to recruit traveling nurses to assist with temporary staffing shortages in health care systems and organizations. The employees were required to sign confidentiality and nondisclosure agreements that included a nonsolicitation of employees provision purporting to prevent those employees from soliciting AMN employees for one year, which would have restricted the number of nurses the recruiters could work with while employed by their new staffing agency.

In affirming the lower court's ruling that the employee nonsolicitation provision was void under Section 16600, the Court of Appeal questioned the continuing viability of Loral in light of the California Supreme Court's 2008 decision in Edwards v. Arthur Andersen LLP, but concluded that even if Loral survived Edwards, the specific nonsolicitation clause at issue in AMN effectively restrained the recruiters from engaging in their chosen profession and thus constituted an unenforceable restraint on trade. In Edwards, the California Supreme Court analyzed the noncompetition and customer nonsolicitation provisions contained in a former Arthur Andersen accountant's employment agreement and concluded that those post-employment restraints were not subject to a reasonableness standard under Section 16600; however, the court did not address the employee nonsolicitation provision in the agreement, nor did it expressly overrule Loral.

Most recently, a federal judge in California interpreted the AMN decision broadly and refused to limit its holding to recruiters. In Barker v. Insight Global, LLC, the U.S. District Court for the Northern District of California concluded that California law, in light of AMN and Edwards, "is properly interpreted … to invalidate employee nonsolicitation provisions." The court further rejected the argument that the holding in AMN should be limited because of the particular job duties—employee recruiting—at issue in that case.

Impact on Employers

These recent decisions raise questions about the continued viability of employee nonsolicitation provisions in California. Barker's broad interpretation of AMN is not controlling on California state courts, and those courts could continue to follow Loral and regard AMN as distinguishable in light of the nature of the work at issue in that case, namely the recruitment of employees.

However, until the California Supreme Court or the California Legislature has an opportunity to address the validity of employee nonsolicitation provisions, employers should carefully consider the risks and benefits of including an employee nonsolicitation provision in a contract with a California employee.

Matthew T. McLaughlin is an attorney with Nixon Peabody in Boston and New York City. Conor McNamara is an attorney with Nixon Peabody in San Francisco. © 2019 Nixon Peabody. All rights reserved. Reposted with permission.

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