Calif. Court Limits Use of Employee Nonsolicitation Agreements

By Stephen Tedesco and Melissa McDonagh © Littler November 21, 2018
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Calif. Court Limits Use of Employee Nonsolicitation Agreements

It is well-established that restrictive covenants, such as noncompetes, are prohibited by statute in California. Since the decision by the California Supreme Court that partial restraints like customer nonsolicitation clauses were void under Business and Professions Code Section 16600, the courts have been strictly interpreting any covenant that impinges on employment opportunities.  

For example, over recent years, employers have come to understand that no-hire agreements are ordinarily off limits. However, the California Supreme Court in Edwards v. Arthur Andersen, LLP expressly declined to consider whether employee nonsolicitation provisions were void. Based on prior case law, those provisions were considered valid until recently. Now, a decision by a California Court of Appeal rejecting prior established case law seriously calls into question whether employee nonsolicitation clauses restraining former employees from soliciting former co-workers to leave the company's employ are even allowed.

Summary

In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., the California Court of Appeal, Fourth Appellate District, held that the employee nonsolicitation agreement before it constituted an unenforceable restraint on trade, prohibited under Business and Professions Code Section 16600. 

The parties in the lawsuit compete in the business of providing healthcare professionals, such as travel nurses, on a temporary basis to medical facilities. The individually-named defendants left AMN to work for Aya as travel-nurse recruiters. AMN claimed that the defendant's travel-nurse recruiters had solicited AMN's travel nurses on behalf of Aya and filed suit against Aya and the travel-nurse recruiters asserting claims for breach of contract based on an employee nonsolicitation clause, unfair competition based on use of confidential information and misappropriation of trade secrets.  

The employee nonsolicitation agreement at issue prohibited the travel-nurse recruiters from soliciting any employee of AMN to leave the service of AMN for a period of at least 12 months. 

AMN claimed the nonsolicitation clause was valid because, based on the earlier decision in Loral Corporation v. Moyes, it merely prohibited the recruiters from soliciting current AMN travel nurses. 

The Court of Appeal disagreed, rejecting the Moyes decision as incompatible with the California Supreme Court's decision in Edwards. The court held that the provision clearly restrained the recruiters from practicing with Aya their chosen profession of recruiting travel nurses. 

The Court of Appeal noted that the provision had the effect of restricting the number of nurses with whom a recruiter could work, and consequently, AMN was limiting the amount of compensation a recruiter would receive after leaving AMN's employ.

In Moyes, which was persuasive case law for over 30 years, the court held that an agreement restraining a former executive from raiding his former employer's employees was valid. The Moyes court reasoned that such an agreement was a reasonable restraint on trade when it was limited to restraining an employee from interfering with his former employer by raiding employees because it only slightly affected the employees. Employees were not prohibited from seeking employment with the defendant's new employer, but rather, only lost the option of being contacted first by the defendant. 

The dominant interpretation of the law since Moyes was that a former employee who was subject to a nonsolicitation clause could receive and consider applications from other employees of their former employer even though by contract the former employee could be prevented from directly soliciting their applications.

The Court of Appeal in AMN questioned the continuing persuasiveness of Moyes, finding that the reasoning in Moyes was inconsistent with the decision in Edwards.  The AMN court held that the employee nonsolicitation provision was void under Section 16600 because Edwards rejected the limited restriction or rule of reasonableness standard used in Moyes.  The court "thus doubt[ed] the continued viability of Moyes post-Edwards."

In addition, and as an alternative basis, the court also distinguished Moyes because the defendant's recruiters were in the business of recruiting and placing travel nurses on a temporary basis in medical facilities. Thus, even if Moyes remained good law, the employee nonsolicitation agreement effectively restrained recruiters from engaging in their chosen profession.

What Now?

The AMN decision calls into question whether employee nonsolicitation agreements are enforceable in California. The ruling unequivocally rejects the holding by the Moyes court that restricting solicitation of employees was not a per se violation of Section 16600. This ambiguity will continue until other courts, and ultimately the California Supreme Court, weigh in.

Until then, most employers can find some small comfort in the AMN court's focus on the fact that the individual defendants were in the business of recruiting, and therefore, the effect of the nonsolicitation agreement went beyond stabilization of the workforce without restraining an employee's ability to engage in his or her profession. 

This narrow holding may be inapplicable to employers who are not in the business of recruiting employees. However, the decision appears to add a hurdle to any staffing agency seeking to enforce its employee nonsolicitation agreement and protect its trade secret information. 

The problem for every other employer, if the broader holding is upheld, is that the nonsolicitation provisions routinely found in nondisclosure agreements that were previously considered valid may now be susceptible to challenge.  

This decision does not apply solely to California-based employers but extends to any out-of-state business that has employees within California. Those employers cannot avoid this issue by choosing a state other than California for its choice of law. Section 925 of the California Labor Code prohibits the use of contract provisions that apply another state's law or require adjudication of disputes in another state as a condition of employment for any individual who primarily resides and works in California. 

Other jurisdictions may also refuse to enforce a restrictive covenant against a California employee if it is against California's fundamental public policy prohibiting restraints on trade as codified in Section 16600.

The potential impact of this ruling cannot be overstated. Nonsolicitation clauses are commonly found in nondisclosure agreements. If the broader ruling is followed by other courts, then not only may these provisions be considered void, but the use of such provisions may be considered an unfair business practice. Claims to prevent employee raiding, no matter how blatant, may be in jeopardy unless an employer can show that the raiding was done with the use of trade secret information taken by the former employee. Indeed, depending on the facts, the former employees may have claims against the employer. 

These cases will continue to be fact specific, but careful attention must be paid to the agreements underlying any claims. It is important for employers to work closely with employment counsel to manage the risks presented by this decision.  Employers may need to seek guidance not only for the drafting of new agreements, but also for reviewing current or legacy agreements. Employers are going to have to weigh the legal risk of retaining these clauses in some fashion against any perceived benefit in using such clauses to promote a stable workforce. 

Stephen Tedesco is an attorney with Littler in San Francisco. Melissa McDonagh is an attorney with Littler in Boston © 2018 Littler. All rights reserved. Reposted with permission. 

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