Non-Compete News: Is a Non-Solicitation of Employees Provision Enforceable in California?

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Executive Summary: Last month, California’s Fourth District Court of Appeal issued AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., 28 Cal. App. 5th 923 (Cal. Ct. App. 2018), a decision calling into question the validity of non-solicitation of employees a/k/a anti-piracy provisions in California. Prior to this decision, California’s Supreme Court had left open the issue of whether anti-piracy provisions were enforceable. Arguably, there now exists a split in authority in California with regard to the enforcement of these provisions, although this recent decision may be construed narrowly to its context: staffing companies.

Background

Section 16600 of California’s Business and Professions Code provides that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Under the chapter, only three exceptions exist where the contractual restraint will be enforced: (1) sale of goodwill or interest in a business; (2) dissolution of a partnership; or (3) dissolution or sale of a limited liability company. §§ 16601; 16602; 16602.5. California courts have strictly interpreted this chapter and held that non-compete and non-solicitation of customers provisions in employee contracts are void unless they fall within one of the three exceptions.

While California courts have strongly opposed non-competes (and non-solicitation of customers provisions), they have been more flexible when it comes to employee contracts that include non-solicitation of employees provisions. The leading case addressing non-solicitation of employees provisions is Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal. Ct. App. 1985). In Moyes, California’s Sixth District Court of Appeal upheld a non-solicitation provision. The case involved an executive officer who left the plaintiff company and began poaching the plaintiff’s employees. The court reasoned that the poached employees were not restricted from seeking employment with the defendant, nor restricted from contacting the plaintiff and, thus, the non-solicitation provision only slightly affected them. Due to this limited effect on employees, the court held that the contract including the anti-piracy provision was enforceable.

Several years after the Moyes decision, the California Supreme Court decided Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (Cal. 2008). In this decision, the California Supreme Court established a broad prohibition against non-compete provisions and rejected the common law “rule of reasonableness” and the Ninth Circuit’s “narrow restraint exception.” The court interpreted Section 16600 to be a “settled public policy in favor of open competition.” However, the court did not address the validity of anti-piracy provisions. While no California appellate court has since addressed this issue in a published decision, federal district courts in California have repeatedly upheld Moyes and found such provisions to be enforceable. For example, see Barker v. Insight Global, LLC, No. 16-cv-07186-BLF, 2018 U.S. Dist. LEXIS 123896 (N.D. Cal. July 24, 2018).

AMN Decision

In AMN Healthcare, the court called into the question the Moyes decision and the validity of non-solicitation of employees provisions. The case involved two competing healthcare staffing companies that provide travel nurses to medical care facilities. Included in AMN’s confidentiality and non-disclosure agreement was an anti-piracy provision that prevented employees from soliciting any AMN employees to leave for a period of one year. The agreement included in the definition of “employees” those employees that AMN staffed to its clients. In 2015, a few recruiters left AMN to join Aya (for different reasons and at different times) and, shortly after, recruited a few of AMN’s travel nurses to join them at Aya. AMN filed a lawsuit against Aya and its former recruiters asserting, among other claims, a breach of the non-solicitation provision.

Aya and the former recruiters filed a cross-complaint asserting that the non-solicitation provision was void under Section 16600 of California’s Business and Professions Code. They argued that it was an improper restraint on the former recruiters’ ability to engage in their profession – soliciting and recruiting travel nurses. The trial court agreed and granted summary judgment in favor of Aya, holding that the anti-piracy provision was an unlawful restraint on trade in violation of Section 16600. AMN then appealed the trial court’s decision to the Court of Appeal, who conducted an independent assessment of the trial court’s ruling.

In analyzing the issue of the anti-piracy provision, the Court of Appeal reviewed the Moyes and Edwards decisions. AMN relied on Moyes in arguing that the non-solicitation provision was valid, but the court rejected AMN’s reliance on Moyes and called into question the continuing viability of the decision. The court held that the Moyes decision’s use of a reasonableness standard in analyzing the non-solicitation clause directly conflicted with the Edwards decision. Further, the court held that the facts were distinguishable, as restricting the recruiters from soliciting employees in the context of staffing companies would restrain them from engaging in their profession. The Moyes decision, on the other hand, was decided in the much more common context of preventing an employee from poaching his former employer’s employees, where the essence of the company business was not competing in the staffing industry. Given these reasons, the court of appeal affirmed the trial court’s ruling.

Employers’ Bottom Line:

While the AMN decision questioned the continued viability of Moyes, employers should note that this decision involved unique facts. Given the nature of the staffing industry, a non-solicitation of employees provision would essentially function as a non-competition agreement. Further, district courts applying California law have repeatedly affirmed Moyes (even in light of Edwards) and upheld non-solicitation of employees provisions that are narrowly construed. Overall, it is likely that courts will distinguish the holding in AMN and continue to enforce these types of agreements outside the context of staffing companies. However, employers should evaluate any current non-solicitation of employees provisions and use care in deciding whether to enforce such provisions in court.

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.

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