Employee Nonsolicitation Provisions May No Longer Be Lawful in California

By Danton Liang

In 2008, the California Supreme Court in Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937 set forth a broad prohibition against non-compete provisions, but left open the question of whether employee non-solicitation provisions are enforceable.  A decade later, the California Court of Appeal for the Fourth Appellate District may have finally answered that question in the negative. 

In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., the California Court of Appeal held that employee nonsolicitation agreements—even if reasonable and narrowly tailored—are void, unless they fall within one of the narrow statutory exceptions specifically pertaining to the sale of a business or improper use of the employer’s trade secrets.  In AMN, the employer sought to enforce its employee nonsolicitation provision against four former AMN employees, who served as recruiters.  AMN alleged that the former recruiters had solicited various nurses to leave their employment with AMN and work for the recruiters’ new employer in clear violation of the nonsolicitation agreement.  The recruiters countersued, and moved for summary judgment, alleging that the employee no solicitation provision violated Section 16600 of California’s Business and Professions Code, which broadly prohibits contracts restraining an individual’s right to engage in a lawful profession, trade, or business.  The trial court granted summary judgment in favor of the recruiters.  Affirming the trial court’s grant of summary judgment, the Court of Appeal rejected AMN’s reliance on the seminal case of Loral Corp v. Moyes (1985) 174 Cal. App. 3d 268, which had upheld a provision that restrained a former executive from “raiding” his former employer’s employees, finding that such a provision was reasonable and limited.

While the AMN Court of Appeal could have stated that the case before it was factually distinguishable from Loral since the recruiters were directly restrained from recruiting—their very profession and trade— the Court went even further.  The Court emphasized that the Loral “reasonableness” standard directly conflicted with the 2008 Edwards holding that Section 16600 unambiguously “prevents a former employer from restraining a former employee from engaging in his or her ‘lawful profession, trade or business of any kind,’ absent statutory exceptions . . . .”  In other words, the AMN court suggested that not only are employee nonsolicits pertaining to recruiters invalid, but that such provisions also would be invalid for any type of employee occupation.  It remains to be seen whether other courts will read AMN narrowly and continue to follow Loral, notwithstanding AMN’s apparent departure.

The Court of Appeal’s doubt as to the continued viability of Loral signals that employee nonsolicitation agreements—regardless of their reasonableness—may be unlawful in the State of California.  Employers are advised to consult with counsel and may wish to consider removing employee nonsolicits from their California agreements.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s