Insights / Employment Advisor
California Court Limits Use of Employee Non-Solicitation Agreements
By Judith Droz Keyes and Tracy Thompson
11.15.18
In California, any contract under which a person is prevented from engaging in his or her profession is, with limited exceptions, void under Section 16600 of the Business & Professions Code. Section 16600 has long been recognized as embodying California’s strong public policy favoring employee mobility and competition. While agreements purporting to prohibit a former employee from engaging in competition are almost always found to be invalid, prohibitions on employee solicitation have often been thought of as permissible under Section 16600, because such restrictions generally do not affect an employee’s ability to engage in his or her chosen profession. In a precedent-setting ruling, however, a California Court of Appeal recently held that an employer’s attempt to ban its former recruiters from recruiting away its current employees did, in fact, run afoul of Section 16600. AMN Healthcare, Inc. v. Aya Healthcare Services, Inc.
The relevant facts are these: AMN and Aya are competitors in the business of providing nurses to healthcare facilities for temporary assignments. AMN employed recruiters, each of whom had signed an agreement as a condition of employment that prohibited them, for at least one year after their employment ended, from soliciting AMN employees to leave AMN. The recruiters at issue in the case left AMN and went to work for Aya, where they proceeded to recruit AMN nurses in contravention of the agreement they had signed. AMN sued for breach of the agreement. In response, the recruiters and Aya argued that the employee non-solicitation provision was void under Section 16600, and both the trial court and the Court of Appeal agreed.
In reaching its decision (and assessing $190,000 in attorneys’ fees against AMN), the Court reasoned that, because the recruiters were in the business of recruiting, any restriction on their ability to do so would necessarily restrain their right to engage in their chosen profession, and thus would violate Section 16600. In addition, the Court expressed doubt about whether any employee non-solicitation provision in any context, regardless of how “narrow” or “reasonable,” would pass muster under Section 16600. Although other courts have in some circumstances found that such restrictions are permissible (see e.g., Loral Corp v. Moyes), the AMN Court questioned the continued viability of those decisions.
In addition to contending that the recruiters breached their agreement, AMN argued that the identity of AMN’s employees was confidential information, and that the recruiters and Aya improperly used that information in recruiting the AMN employees. The Court made short shrift of that argument, finding that the identity of employees is not – and presumably never will be – a protectable trade secret.
Employers in the recruiting field should immediately undertake a review of all employment agreements, employee handbooks, non-disclosure and proprietary information agreements, and other employment documents, and modify them in accordance with the AMN decision. New documentation that expressly supersedes any non-compliant terms of existing agreements should be implemented.
In addition, all employers with California operations and California employees are advised to review their various agreements to determine whether a non-solicitation term should be modified to be as narrow as possible to achieve the employer’s objectives, or whether it should be eliminated entirely. Given the uncertainty of the law at this point, and given the risks of attempting to enforce such provisions, legal advice from experienced California counsel should be sought before proceeding with an enforcement effort, including the issuance of a cease-and-desist letter. Apart from a possible fee award if the employer tries unsuccessfully to enforce a restrictive covenant, employees can preemptively seek to void such provisions as violating public policy if the employee either is not hired or is terminated for refusing to agree to such a provision. See e.g., Latona v. Aetna US Healthcare Inc., D’sa v Playhut, Inc., and Application Group v. Hunter. In addition, an invalid non-solicitation requirement can constitute a violation of California’s Unfair Practices Act. (See B & P Code sections 17200 et seq. and Application Group v Hunter).
The law in this area continues to evolve, but what is clear is that California courts are increasingly unwilling to make exceptions to Section 16600 for covenants restricting employee mobility and competition unless trade secrets – genuine trade secrets – are involved.
The relevant facts are these: AMN and Aya are competitors in the business of providing nurses to healthcare facilities for temporary assignments. AMN employed recruiters, each of whom had signed an agreement as a condition of employment that prohibited them, for at least one year after their employment ended, from soliciting AMN employees to leave AMN. The recruiters at issue in the case left AMN and went to work for Aya, where they proceeded to recruit AMN nurses in contravention of the agreement they had signed. AMN sued for breach of the agreement. In response, the recruiters and Aya argued that the employee non-solicitation provision was void under Section 16600, and both the trial court and the Court of Appeal agreed.
In reaching its decision (and assessing $190,000 in attorneys’ fees against AMN), the Court reasoned that, because the recruiters were in the business of recruiting, any restriction on their ability to do so would necessarily restrain their right to engage in their chosen profession, and thus would violate Section 16600. In addition, the Court expressed doubt about whether any employee non-solicitation provision in any context, regardless of how “narrow” or “reasonable,” would pass muster under Section 16600. Although other courts have in some circumstances found that such restrictions are permissible (see e.g., Loral Corp v. Moyes), the AMN Court questioned the continued viability of those decisions.
In addition to contending that the recruiters breached their agreement, AMN argued that the identity of AMN’s employees was confidential information, and that the recruiters and Aya improperly used that information in recruiting the AMN employees. The Court made short shrift of that argument, finding that the identity of employees is not – and presumably never will be – a protectable trade secret.
Key Takeaways for Employers
In light of the AMN decision, employers should not assume that post-employment restrictions on employee solicitation are lawful.Employers in the recruiting field should immediately undertake a review of all employment agreements, employee handbooks, non-disclosure and proprietary information agreements, and other employment documents, and modify them in accordance with the AMN decision. New documentation that expressly supersedes any non-compliant terms of existing agreements should be implemented.
In addition, all employers with California operations and California employees are advised to review their various agreements to determine whether a non-solicitation term should be modified to be as narrow as possible to achieve the employer’s objectives, or whether it should be eliminated entirely. Given the uncertainty of the law at this point, and given the risks of attempting to enforce such provisions, legal advice from experienced California counsel should be sought before proceeding with an enforcement effort, including the issuance of a cease-and-desist letter. Apart from a possible fee award if the employer tries unsuccessfully to enforce a restrictive covenant, employees can preemptively seek to void such provisions as violating public policy if the employee either is not hired or is terminated for refusing to agree to such a provision. See e.g., Latona v. Aetna US Healthcare Inc., D’sa v Playhut, Inc., and Application Group v. Hunter. In addition, an invalid non-solicitation requirement can constitute a violation of California’s Unfair Practices Act. (See B & P Code sections 17200 et seq. and Application Group v Hunter).
The law in this area continues to evolve, but what is clear is that California courts are increasingly unwilling to make exceptions to Section 16600 for covenants restricting employee mobility and competition unless trade secrets – genuine trade secrets – are involved.