California employers and their legal counsel reasonably had assumed that California law distinguishes employee non-solicitation agreements from noncompetition agreements and that the former were enforceable. That assumption was based largely on a 1985 decision by the California Court of Appeal in Loral Corp. v. Moyes, 174 Cal. App. 3d 268, which enforced an agreement prohibiting a former company executive from soliciting the employees of his former employer to join his new venture. However, that assumption has been upended by recent decisions by the California Court of Appeal and the United States District Court for the Northern District of California invalidating employee non-solicitation agreements. Because it is now possible that California courts will invalidate employee non-solicitation agreements, employers will need to carefully consider eliminating those provisions from agreements with their employees.
California employers became concerned when the California Court of Appeal, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., (2018) 28 Cal. App. 5th 923, ruled that an employee non-solicitation agreement violated California law. The employer in AMN Healthcare required employees to sign a confidentiality and nondisclosure agreement that prohibited – for one year after termination of their employment by AMN Healthcare – former employees from soliciting employees of AMN Healthcare to leave their employment by that company. The Court of Appeal in AMN Healthcare held that the non-solicitation provision violated California Business and Professions Code Section 16600, which declares invalid “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” It was not clear from AMN Healthcare, however, whether that decision repudiated Loral Corp. entirely and would invalidate any employee non-solicitation agreement or should be read for the more narrow proposition that the employee non-solicitation agreement at issue in AMN Healthcare – based on the facts unique to that case – was unenforceable. The latter reading seemed very reasonable, in part because the employees in that case were in the business of recruiting and placing travel nurses on a temporary basis in medical facilities, and an employee non-solicitation agreement would restrain those employees from engaging in their recruiting business. This fact mitigated employer concern.
Concern heightened, however, when the District Court in Barker v. Insight Global, LLC, 2019 WL 176260 (Jan. 11, 2019 N.D. Cal.), rejected a reading of AMN Healthcare that would confine that court’s invalidation of the employee non-solicitation agreement to the narrow facts at issue in that case. In Barker, Judge Beth Labson Freeman of the Northern District of California granted plaintiff John Barker’s motion for reconsideration on an order dismissing two of Barker’s claims relating to an agreement Barker had signed with his former employer prohibiting him from soliciting the employer’s employees. Barker claimed the provision prohibiting him from soliciting employees violated California’s Unfair Competition Law. Barker argued that the decision by the California Court of Appeal in AMN Healthcare constituted a change in law that required reconsideration of the District Court’s prior order.
The District Court in Barker concluded that it was “convinced by the reasoning in AMN that California law is properly interpreted . . . to invalidate employee non-solicitation provisions.” The District Court expressly rejected a reading of AMN Healthcare that would confine that court’s invalidation of the employee non-solicitation agreement to the narrow facts at issue in that case. Unless the California Supreme Court weighs in and rules differently than the courts in AMN Healthcare or Barker, California employers should reconsider their use of employee non-solicitation agreements, as there is now a reasonable concern that such agreements will be found invalid in California.