Is This the Beginning of the End For Non-Solicitation Agreements in California?

Is This the Beginning of the End For Non-Solicitation Agreements in California?

California employers often require employees to execute non-solicitation agreements with the goal of preventing former employees from poaching their employees.  In a recent decision, the Fourth District Court of Appeals of California called into question the validity of such non-solicitation agreements. 

At the heart of the case is Business and Professions Code section 16600, which states: “Except 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.”  Section 16600 encapsulates California’s strong public policy in ensuring its citizens maintain the right to pursue any lawful employment.  In the past, California Courts have interpreted Section 16600 to mean non-compete agreements were prohibited, but non-solicitation agreements prohibiting employees from recruiting employees from their former employers were still valid.  The Court of Appeals decision in AMN Healthcare, Inc. v. AYA Healthcare Services, Inc. casts doubt on the status quo. 

In AMN Healthcare, Inc. v. AYA Healthcare Services, Inc. et al both AMN and AYA were in the business of placing temporary, professional, medical professionals in the healthcare industry.  Included among these professionals were “Travel Nurses” who AMN placed on 13-week assignments.  As a condition of employment AMN required its employees, including Travel Nurses, to sign a Confidentiality and Non-Disclosure Agreement (“CNDA”).  AMN’s CNDA contained a non-solicitation provision prohibiting AMN employees, or former employees, from soliciting other AMN employees.  The non-solicitation agreement was effective for a period of at least one year after the employee’s last day at AMN. 

A recruiter for AMN, and an individual defendant in the case, resigned her employment with AMN and went to work for AYA as a recruiter.  AMN’s lawsuit alleged that at or near her resignation, the employee solicited two Travel Nurses to leave AMN and go to AYA with her in violation of the CNDA.  AYA successfully moved for summary judgment on AMN’s cause of action for breach of the CNDA, arguing the non-solicitation portion of the CNDA prevented individual defendants from engaging in their lawful trade or profession; AMN appealed. 

The California Court of Appeal for the Fourth District upheld the trial court’s granting of summary judgment, making the non-solicitation agreement unenforceable.  In doing so, the Court relied on two key facts.  First, the court noted that, if enforced, the CNDA would restrict the number of nurses with whom a former AMN recruiter could work with at her new employer, limiting the employees amount of compensation as a recruiter.  Additionally, the court observed that the non-solicitation agreement was considerably longer than needed.  Specifically, AMN’s Travel Nurses were temporarily assigned for 13-week periods.  Yet the non-solicitation agreement was effective for a period of one year after the employment ended, or, said another way, for four assignment periods, giving AMN an advantage and restraining the employee’s ability to pursue their chosen employment. 

The Court also rejected AMN’s argument that, based on prior case law, a reasonableness standard should be applied to non-solicitation agreements.  Here, the Court reasoned that subsequent case law  invalidated the reasonableness standard in favor of a plain language interpretation of Section 16600 which invalidates any contract which “prevents a former employer from restraining a former employee from engage in his or her ‘lawful profession, trade, or business of any kind.” 

It is not all doom and gloom.  The Court’s reasoning left open the possibility of enforcing valid non-solicitation agreements for certain employees.  Specifically, the Court reasoned that this specific non-solicitation agreement was not enforceable as to a Recruiter because she made her living on recruiting Travel Nurses and any impediment on her ability to do so was a restraint on her chosen trade.  However, if instead of a Recruiter, a Travel Nurse had left AMN and then recruited other Travel Nurses to leave AMN in violation of the non-solicitation agreement, a court could potentially uphold the non-solicitation agreement because this reasoning is not present.  In other words, prohibiting a Travel Nurse from recruiting other Travel Nurses might not place any restraint on the Travel Nurse’s chosen profession as a Travel Nurse’s job description would not include recruiting.  This or a similar scenario is likely to play out in the courts given the ruling in AMN Healthcare, Inc. v. AYA Healthcare Services, Inc. et al.  Only then will we know if non-solicitation agreements are a thing of the past. 

The AMN Healthcare, Inc. v. AYA Healthcare Services, Inc. et al decision does not yet foreclose the possibility of enforcing valid, enforceable non-solicitation agreements in the state of California.  But this is a watershed moment for the viability of non-solicitation agreements for California employers, many of which could find themselves fighting an uphill battle to enforce their non-solicitation agreements if they do not bring them up to date and assess their validity in light of this recent decision.  Accordingly, employers should review their non-solicitation agreements with their legal counsel to ensure the non-solicitation agreement addresses the employer’s concerns regarding employee solicitation, but does not create an unreasonable restraint on the employees’ ability to pursue their chosen career after their employment has ended. 

By Ryan P. Kennedy

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