A recent California Court of Appeal decision may impact the use of non-solicitation of employee provisions in agreements you may provide your employees.
The Fourth Appellate District of the California Court of Appeals recently issued its decision in the case of AMN Healthcare v. Aya Healthcare, Case No. D071924 (November 1, 2018). In the case, AMN Healthcare sought to enforce a provision contained in its Confidentiality and Non-Disclosure Agreement that prohibited employees who left AMN’s employ from soliciting AMN employees to switch employment for a period of one year. In affirming the trial court’s granting of defendant’s Motion for Summary Judgment, the Court of Appeals held that the non-solicitation of employee provision AMN sought to enforce against its former employees was void as an improper restriction from a person engaging in a lawful profession, trade, or business in violation of California Business & Professions Code 16600. As you may know, California Business & Professions Code Section 16600 is the prohibition against restrictive employment covenants in California corporate contracts. In its decision, the court held that AMN’s one-year prohibition against former employees soliciting current AMN employees impermissibly restricted a person’s ability to perform work. The Court found that such a prohibition would have limited the former employee’s ability to recruit or even contact temporary nurses to work with their new staffing agency. The Court further found that AMN’s non-solicitation clause thus greatly restricted the ability of its former employees to earn a living. In so holding, the court relied upon a strict reading of the statute prohibiting restrictive employment covenants, noting that California public policy advocated the free movement of employees and their ability to perform their profession with only very limited statutory exceptions.
Given this holding, we recommend our clients review and potentially revise any agreements your company may have entered into with employees to refine or remove the non-solicitation of employees’ language previously believed acceptable under the California Court of Appeals’ decision in Loral Corp. v. Moyes, 174 Cal. App.3d 268 (1985). Given that we now have competing appellate decisions both upholding and denigrating non-solicitation agreements, your judgment whether to follow the earlier Loral precedent or the new and restrictive AMN Healthcare precedent boils down to an assessment of how much legal risk your company is willing to accept and how much importance your management team accords non-solicitation agreements. Furthermore, we recommend clients review any non-solicitation of employee provisions you may have installed in severance agreements executed with former employees to identify the limits of the enforceability of those clauses. While some companies doing business in California may attempt to factually distinguish the AMN Healthcare v. Aya Healthcare holding based on the unique nature of the staffing industry and the industry practice that temporary nurses often seek employment with more than one staffing agency at a time (which makes any non-solicitation of employee provision more restrictive than in a general context), this will be an uphill legal battle. The AMN Healthcare court’s ruling anticipated such an argument and explicitly stated that the court did not believe the legal basis upon which non-solicitation of employee provisions had previously been found valid survived the California Supreme Court’s more recent ruling in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008). We also note a trend in the California Supreme Court in recent years to prefer to hand down definitive “black letter law” decisions in employment cases and to shy away increasing from laying down complex “lawyer tests” allowing for differing results from the application of employment statutes. The AMN Healthcare case decision follows this model of laying down a strict “black” or “white” rule lacking discretion to vary it upon unique or differing facts. Pending either an appeal of AMN Healthcare or another case in the future to make its way to the California Supreme Court to declare the definitive reach of Business & Professions Code Section 16600 as to non-solicitation clauses, there is every reason for companies covered by Section 16600 to be very cautious. This is because California courts have already ruled that compensatory and even very costly punitive damages are available for violations of B&P Section 16600.
Thus, potential revisions may include revising non-solicitation of employee provisions to allow solicitations but to emphasize prohibitions on trade secret use or disclosure after termination from your company. Feel free to contact us to discuss the appropriate corrective steps you should take to protect your rights as to employee raids by your competitors.