Ninth Circuit Indicates Restrictive Covenants in Collaborative Business-to-Business Agreements Can Escape Per Se Liability

Littler
Contact

Littler

Few experts in the field of unfair competition law would disagree that the 2018 decision in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc.,1 was a game changer in California, overturning what was then approximately 30 years’ worth of jurisprudence upholding the enforceability of employee non-solicitation covenants in the Golden State.  Moreover, while the decision was viewed by some as limited to its own facts (precluding the enforcement of non-solicitation covenants within the recruiting industry where it is someone’s job to solicit people for work), that viewpoint was quickly dashed with several federal court decisions, beginning with Barker v. Insight Global,2 which followed the AMN Healthcare decision in concluding an employee non-solicitation covenant is a partial restraint on trade under California law,3 and that the holding of AMN Healthcare should not be limited to the recruitment context.4 

The holding of AMN Healthcare has also had further trickle-down effects, confusing businesses whose entire purpose is to provide temporary workers and/or experts to their clients who otherwise would have not been able to hire such talent on their own and/or could not afford to do so on a longer-term basis.  Moreover, the problem is not limited to the business of providing talent. The problem also applies to businesses that, for example, may be evaluating a business to acquire, and thus want exposure to the target’s talent to evaluate whether the talent justifies paying multi-millions of dollars to acquire that business.  In those circumstances, companies often enter into non-disclosure agreements (or NDAs) that contain, among other things, a non-solicitation covenant that would prevent the parties to the potential transaction from soliciting the talent of the other party. 

While businesses looking for support to uphold these seemingly logical limitations on protecting their talent had to dig deep to find support, the law has not been the model of clarity in this context. For example, in 1983, the California Court of Appeal decided Webb v. West Side District Hospital.5 There, the court considered whether a non-solicitation covenant between a staffing agency providing doctors to hospitals was “reasonable” where the hospital’s solicitation of the doctors was not per se banned but subject to the payment of a fee if, in fact, the hospital did solicit the staffing agency’s medical talent that had been placed with the hospital client. Although the Webb court upheld the enforceability of the non-solicitation covenants in the business-to-business context, it was called into question in VL Systems, Inc. v. Unisen, Inc.6 That case arose from a challenge of an employee non-solicitation/no-hire provision between two businesses arising from a computer consulting contract.  The contract prohibited the client  from hiring VL Systems’ employees for 12 months after the contract ended.  The court found that the provision was unenforceable, but based this decision on the fact that the provision was overly broad, and expressly took no position on whether a more narrowly drawn and limited provision would survive scrutiny.7

Finally, the California Supreme Court’s analysis in Edwards v. Arthur Andersen LLP8 did not, according to some, provide businesses the clarity they could rely on in structuring business agreements with others who came into contact with their talent.  But, the Webb court’s “reasonableness” analysis seemed to be inconsistent with Edwards.  Indeed, under Edwards, all that must be shown is that the restriction has the effect of restraining the individual from pursuing a lawful business, trade or profession.  While the factual situation underlying Edwards was not a business-to-business dispute, the application of a reasonableness standard appeared to be dead where there is a contractual provision that arguably has the effect of inhibiting employee mobility. 

After Edwards and following AMN Healthcare and its progeny, the landscape around the enforcement of non-solicitation covenants appeared to be heavily skewed towards unenforceability.  Then, just over one year ago, the California Supreme Court issued another potential game-changing opinion in Ixchel Pharma, LLC v. Biogen, Inc.9 There, Forward Pharma (“Forward”) had entered into a “collaboration contract” with Ixchel Pharma, LLC (“Ixchel”), allowing Ixchel to develop a drug for the treatment of a disorder known as Freidreich’s ataxia. However, Forward had been in litigation with a third party, Biogen, Inc., (“Biogen”) over claims of patent infringement, and to settle the patent dispute, Forward and Biogen entered into a settlement and license agreement that required Forward to terminate existing, and to not enter into any new, agreements with Ixchel for the development of any product using a particular drug for the treatment of a human condition, including Friedreich’s ataxia.  This resulted in Forward terminating its agreement with Ixchel and Ixchel suing Biogen for antitrust violations and tortious interference with the contract, among other claims. The California Supreme Court considered whether the Forward-Biogen agreements violated Section 16600 of the California Business & Professions Code. In so doing, the Supreme Court evaluated the proper standard to determine whether Section 16600 voids a contract by which a business is restrained from engaging in a lawful trade or business with another business.  After conducting a detailed analysis of Section 16600 and its predecessor statute, the Supreme Court held the courts should apply a “rule of reason” in evaluating whether an agreement between businesses violates Section 16600.  The Supreme Court was careful to explain that in the employment context, its decision in Edwards—wherein the Supreme Court had rejected that a rule-of-reason standard applies to non-compete agreements in the employment settingwas still good law when evaluating disputes between employers and their employees over such restrictive covenants.   

While Ixchel has been cited several times in a variety of contexts, according to our research as of the date of this publication, since Ixchel was published no court has directly addressed the enforceability of non-solicitation covenants entered into between two businesses.  That is until August 19, 2021, with the publishing of Aya Healthcare Services, Inc. v. AMN Healthcare, Inc.10 

Relevant Background of the Healthcare Staffing Agency Industry

The facts set forth below are taken from the decision. 

The parties are both healthcare staffing companies offering staffing services for various healthcare employees. In particular, this dispute centered on the assignment of travel nurses to hospitals on a temporary, medium-term basis when the hospitals are either understaffed and need additional nurses on a temporary basis, or the hospitals require a nurse to perform certain assignment when their own nurses cannot perform the assignment.11 As the court explained, hospitals rely on the services of travel nurses only when they lack any alternative.12

AMN Health Care, Inc. (“AMN”) and Aya Healthcare Services, Inc. (“Aya”) employed travel nurse recruiters who would find, screen, and recruit travel nurses. The recruiters maintain relationships with the travel nurses and work to place those travel nurses on temporary assignments.  Moreover, the opinion noted that staffing agencies can either place the travel nurses directly with the hospital if they have a relationship with them, or indirectly either through an electronic platform or through the hospital’s managed service provider (“MSP”), which are agencies that manage the hospital’s travel nurse needs.13

The Parties’ Business Relationship and Dispute

According to the U.S. Court of Appeals for the Ninth Circuit, AMN has been a leader in the healthcare staffing industry for over 30 years.14 In 2009, according to the court, AMN became the MSP for an increasing number of hospitals, in addition to providing travel nurses to hospitals on direct placements.15 AMN’s MSP business grew significantly and it became unable to fulfill the demand of the hospitals it serviced.16 As a result, AMN began referring these “spillover assignments” to its network of subcontractors, or associate vendors (“AVs”), which were other healthcare staffing agencies.17

Aya is also a healthcare staffing agency, which was founded in 2009. However, as the district court pointed out, unlike AMN, Aya does not have an MSP business and places nurses either directly with its hospital accounts or indirectly through electronic platforms or MSPs like AMN. Starting in 2010, Aya and AMN entered into their first AV agreement, which allowed Aya to serve AMN’s spillover assignments.18 AMN made these spillover assignments available to Aya through AMN’s electronic platform.19 The companies had a beneficial relationship and Aya ultimately became AMN’s largest AV.20 The parties renewed their AV agreement over the next several years, which included certain non-solicitation agreements.

Around May 2015, Aya began actively soliciting AMN’s travel nurse recruiters.21 In response, in September 2015 AMN cut off Aya’s access to its platform for placing travel nurses, and in December 2015, the parties terminated their prior AV agreements.22

The District Court Litigation

In February 2017, Aya commenced a lawsuit in the United Stated District Court for the Southern District of California against AMN alleging various federal, state, and common law claims. Specifically, Aya claimed that it suffered “exclusionary damages” as a result of AMN’s non-solicitation covenant in the parties’ AV agreements and “retaliatory damages” as a result of AMN’s decision to terminate its AV relationship with Aya.23 Aya claimed that these business practices unreasonably restrained trade and interfered with Aya’s prospective business opportunities in violation of Sections 1 and 2 of the Sherman Antitrust Act, California’s Cartwright Act, and California’s Unfair Competition Law. Aya also alleged that AMN’s conduct interfered with Aya’s prospective business opportunities in violation of common law.24

After discovery commenced, AMN moved for summary judgment on each of Aya’s claims. AMN argued that Aya’s federal and state antitrust claims failed because Aya had not suffered an antitrust injury.25 With regard to the Section 1 claim of an anticompetitive agreement, the district court determined that there was “no evidence of a cartel of healthcare staffing agencies that all agreed to refrain from soliciting or hiring each other’s employees or to retaliate against Aya.”26 After the court considered supplemental briefing with regard to the Section 2 monopolization and attempted monopolization claims, the court determined that there was no evidence that AMN had sufficient market power or that AMN’s conduct was anticompetitive.27 The district court declined to exercise supplemental jurisdiction on Aya’s state law claims and directed the clerk to enter judgment for AMN.28

The Appeal

Aya appealed the district court’s order to the Ninth Circuit. On appeal, Aya asked the Ninth Circuit to recognize that the non-solicitation agreements of the AV agreements constituted a naked no-poaching restraint and were thus per se unlawful.29 In the alternative, Aya argued that that the non-solicitation agreements would still nonetheless violate antitrust laws under the quick-look and rule-of-reason standards.30 Aya further argued that AMN “centralized” the labor market and retaliated against Aya.31 The Ninth Circuit disagreed with Aya’s arguments and affirmed the district court’s order.

Under antitrust laws, agreements that unreasonably restrain trade are illegal.32 Generally, such agreements are analyzed under the rule of reason, where the legitimate justifications for the agreement are weighed against the anticompetitive effects to evaluate whether the there is an unreasonable restraint.33 However, a certain group of restraints have been found to always or almost always restrain trade and are thus per se illegal.34 In other words, the existence of such agreements alone is sufficient to violate antitrust laws, and no further analysis is needed. In addition, courts sometimes apply a “quick-look” analysis “to business activities that are so plainly anticompetitive that courts need undertake only a cursory examination [rather than a full rule-of-reason analysis] before imposing antitrust liability.”35

Horizontal agreements (i.e., agreements between competitors such as the agreements between AMN and Aya) that are naked restraints are always analyzed under the per se standard.36 A restraint is naked if it has no purpose except stifling competition.37 Thus, under the ancillary restraints doctrine, a horizontal agreement is exempt for the per se rule and analyzed under the rule-of-reason standard if the agreement’s restraint is: (1) subordinate and collateral to a separate, legitimate transaction, and (2) reasonably necessary to achieving that transaction’s pro-competitive purpose.38

The Non-Solicitation Agreement Is Not Per Se Illegal

As a threshold matter, the Ninth Circuit agreed with the district court and found that the AV agreements between Aya and AMN were not naked restraints. Aya conceded that the agreements had a pro-competitive purpose “to fulfill the demand of hospitals for travel nurses.” But Aya argued on appeal that the agreements were still a naked restraint because the non-solicitation agreements were not necessary to achieve the pro-competitive purpose.39 The Ninth Circuit disagreed with Aya and found that the non-solicitation was necessary because “it ensures that AMN will not lose its personnel during the collaboration.”40 The Ninth Circuit further explained that without such an agreement, AMN would be less willing to deal with other agencies to supply travel nurses especially given the shortage of nurses. The agreement also allows AMN to collaborate with its competitors for the benefit of their clients without “cutting [its] own throat.”41 The Ninth Circuit thus agreed with the district court and found that the non-solicitation agreement “promotes ‘competitiveness in the healthcare staffing industry’—more hospitals receive more traveling nurses because the non-solicitation agreement allows AMN to give spillover assignments to Aya without endangering its ‘establish[ed] network[ ] [of] recruiters, travel nurses, AVs, and of course, hospital customers.’”42 Accordingly, the Ninth Circuit held that the non-solicitation agreement was an ancillary restraint and not subject to the per se standard. Further, the court held that because per se liability is unwarranted here, the quick-look standard is also inapplicable.43

In reaching this conclusion and rejecting Aya’s arguments, the Ninth Circuit emphasized the importance of the time that the parties entered into the agreement. Specifically, the Ninth Circuit recognized that when conducting this analysis, “courts must look to the time an agreement was adopted.”44 In applying it to the case at hand, the Ninth Circuit found important the fact that the parties entered into the non-solicitation at the time they entered into the agreement to collaborate, not after the collaboration was terminated.45

The Non-Solicitation Agreement Is Not Illegal Under the Rule-of-Reason Analysis

The Ninth Circuit then analyzed the non-solicitation agreements under the rule-of-reason and found that the non-solicitation agreement survives scrutiny. Similar to the approach taken by the California Supreme Court in Ixchel, the Ninth Circuit explained that the rule-of-reason analysis applies a three-step, burden shifting framework:

[First] the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market. If the plaintiff carries its burden, then the burden shifts to the defendant to show a procompetitive rationale for the restraint. If the defendant makes this showing, then the burden shifts back to the plaintiff to demonstrate that the procompetitive efficiencies could be reasonably achieved through less anticompetitive means.46

The Ninth Circuit agreed with the district court that Aya did not carry its burden at step one and did not show an anticompetitive effect through either direct or indirect evidence.  The Ninth Circuit reasoned that Aya’s direct evidence was only a claim of supracompetitive pricing in certain regional markets. But the district court had rejected this argument and the Ninth Circuit affirmed because Aya and its economic expert both failed to provide any evidence to show that the higher prices were a result of the non-solicitation agreement.47 Moreover, the district court found and the Ninth Circuit affirmed that Aya failed to prove an anticompetitive effect through indirect evidence, which requires “proof of market power plus some evidence that the challenged restraint harms competition.”48 Specifically, Aya’s argument that AMN had market power because it had “extraordinary control over the available workflow and plum assignments” was rejected as a conclusory contention, because Aya did not show any evidence of consumer preference, supracompetitive prices, and lower quality services.49 Accordingly, the Ninth Circuit held that the non-solicitation agreement survives rule-of-reason scrutiny.

Takeaways

While the Ninth Circuit did not cite Ixchel, nor any of the other aforementioned cases that analyzed non-solicit covenants between businesses, the Ninth Circuit’s decision appears to clear the way for a variety of agreements entered into by businesses every day with their customers and partners, among others, to include employee non-solicitation covenants. That is because the decision shows that such agreements can escape per se liability. Although this is a federal case, the decision follows California’s recent shift in applying a less-aggressive approach to business-to-business restrictive agreements in Ixchel. It also appears to prevent a party seeking to invalidate such a covenant from claiming that they violate Section 16600 because they operate as a partial restraint on trade, thus limiting the earlier California Court of Appeal AMN Healthcare decision to the employment, versus the business-to-business, context.

The significance of the Ninth Circuit’s AMN Healthcare decision is highlighted by the fact that the Antitrust Division of the United States Department of Justice submitted an amicus curiae brief arguing that the non-solicitation agreement at issue was a naked restraint and thus per se unlawful, and that even under a rule-of-reason analysis the agreement would violate antitrust laws. This signifies that the United States government has an interest in challenging non-solicitation agreements as anticompetitive. However, that the Ninth Circuit considered the government’s arguments yet found in AMN’s favor shows that courts are willing to analyze and uphold such agreements under the rule-of-reason analysis.

Finally, although the Ninth Circuit applied the rule-of-reason analysis, it found that Aya had not met its initial burden and upheld the agreement on those grounds. As such, the decision does not provide complete insight into a full-blown rule-of-reason analysis. Thus, at this stage it is not clear if non-solicitation agreements in the recruiting and staffing industry will survive a rule-of-reason analysis based on the guidance issued by the Federal Trade Commission and U.S. Department of Justice.

As this article likely makes clear, non-solicitation agreements trigger a number of legal issues, both employment-based and also those arising under antitrust laws.  Therefore, companies should first consult with counsel before implementing such restrictive covenants or deciding whether existing covenants are enforceable.

 

Footnotes

1 28 Cal. App. 5th 923 (2018).

2 Case No. 16-cv-07186-BLF, 2019 WL 176260 (N.D. Cal. Jan. 11, 2019).

3 Cal. Bus. & Prof. Code Section 16600.

4 See Barker v. Insight Global, 2019 WL 176260 at *3 (“The court is not persuaded that the secondary ruling in AMN finding the nonsolicitation provision invalid under Loral [Corp. v. Moyes (1983) 174 Cal. App. 3d 268] based upon those employees’ particular job duties abrogates or limits the primary holding.”). 

5 144 Cal.App.3d 946 (1983).

6 152 Cal. App. 4th 708 (2007).

7 Id. at 718.

8 44 Cal.4th 937 (2008).

9 9 Cal.5th 1130 (2020). For a discussion of this case, see Mark Romeo and Simerdip Khangura, Revisiting Restrictive Covenants in a Commercial Setting: The California Supreme Court Applies a Less Aggressive Approach, Littler Insight (Aug. 11, 2020).

10 No. 17CV205-MMA (MDD), ___ F.Supp.3d at ___, 2020 WL 2553181, at *1 (S.D. Cal. May 20, 2020), aff'd, No. 20-55679, 2021 WL 3671384 (9th Cir. Aug. 19, 2021) (“AMN Healthcare I”).

11 Id.

12 Id.

13 Id. (In 2017, agencies placed travel nurses 31% of travel nurses directly with hospitals, 15% through electronic platforms, and 54% through MSPs.)

14 Aya Healthcare Services, Inc. v. AMN Healthcare, Inc., ___ F.4th at ___, 2021 WL 3671384, at *1 (9th Cir. Aug. 19, 2021) (“AMN Healthcare II”)

15 Id.

16 Id at *2.

17 Id.

18 AMN Healthcare I, at *2.

19 Id.

20 Id.

21 Id.

22 Id.

23 Id. at *3.

24 Id. at *1.

25 Id. at *8.

26 Id. at *18.

27 Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., No. 17CV205-MMA (MDD), 2020 WL 3414662, at *8 (S.D. Cal. June 22, 2020), aff'd, No. 20-55679, 2021 WL 3671384 (9th Cir. Aug. 19, 2021).

28 Id.

29 AMN Healthcare II, at *3.

30 Id.

31 Id.

32 United States v. Joyce, 895 F.3d 673, 676 (9th Cir. 2018).

33 Paladin Assocs., Inc. v. Mont. Power Co., 328 F.3d 1145, 1156 (9th Cir. 2003).

34 Joyce, 895 F.3d at 676.

35 Texaco Inc. v. Dagher, 547 U.S. 1, 7 (2006).

36 White Motor Co. v. United States, 372 U.S. 253, 263, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963).

37 Id.

38 AMN Healthcare II, at *4.

39 Id.

40 Id. at *5.

41 Id.

42 Id. (quoting AMN Healthcare I, at *14.)

43 AMN Healthcare II, at *7 n.6

44 AMN Healthcare II, at *5 (quoting Polk Bros., Inc v. Forest City Enters., 776 F.3d 185, 828 (7th Cir. 1985).)

45 AMN Healthcare II, at *5.

46 Ohio v. Am. Express Co., ___ U.S. ___, 138 S. Ct. 2274, 2284, 201 L.Ed.2d 678 (2018).

47 AMN Healthcare II, at *6.

48 Am. Express Co., 138 S. Ct. at 2284.

49 AMN Healthcare II, at *7.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Littler | Attorney Advertising

Written by:

Littler
Contact
more
less

Littler on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.