California Court of Appeal Questions Continuing Viability of Employee Non-Solicitation Agreements
In its 2008 landmark decision Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, the California Supreme Court set forth a broad prohibition against non-compete provisions, but it left open whether or to what extent employee non-solicit provisions were enforceable. Since Edwards, no California appellate court has addressed that issue in a published opinion – until recently. On November 1, the California Court of Appeal in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., ruled that a broadly worded contractual clause that prohibited solicitation of employees for one year after employment was void under California Business and Professions Code section 16600, which provides “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.” The decision calls into question the continuing viability of employee non-solicitation provisions in the employment context, and employers who regularly include such provisions in their agreements should reassess their use and enforcement of those provisions.
AMN and Aya are competing healthcare staffing companies that provide travel nurses, to medical care facilities throughout the country. The individual defendants were former travel nurse recruiters of AMN who left AMN and joined Aya, where they also worked as travel nurse recruiters.
The individual defendants each signed a confidentiality and nondisclosure agreement (CNDA) with AMN, which included a provision preventing them from soliciting any employee of AMN to leave AMN for a one-year period. Section 3.2 of the CDNA provided:
Employee covenants and agrees that during Employee’s employment with the Company and for a period of [one year or] eighteen months after the termination of the employment relationship with the Company, Employee shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of the Company or any Company Affiliate to leave the service of the Company or such Company Affiliate.
Because AMN’s travel nurses were employees of AMN, section 3.2 of the CNDA applied to prevent a former AMN employee from recruiting a travel nurse on a temporary assignment for AMN.
After the individual defendants resigned, AMN sued them, asserting various causes of action, including breach of the non-solicitation provision in the CNDA. Defendants filed a cross-complaint, requesting the court declare the non-solicitation provision in the CNDA void and enjoining AMN from enforcing the provision against other former AMN employees.
The defendants moved for summary judgment of AMN’s complaint and of their own cross-complaint. Defendants claimed that the non-solicitation provision in the CNDA was an improper restraint on individual defendants’ ability to engage in their profession – soliciting and recruiting travel nurses – in violation of Business and Professions Code section 16600. The trial court agreed, and granted defendants summary judgment on AMN’s complaint and granted summary adjudication of defendants’ declaratory relief cause of action. Then the court enjoined AMN from enforcing the employee non-solicitation provision in the CNDA as to any former California employee and awarded defendants attorney’s fees.
The Fourth District Court of Appeal affirmed the trial court’s grant of summary judgment. In doing so, the court concluded that the non-solicitation provision in the CNDA was void under section 16600. “Indeed, the broadly worded provision prevents individual defendants, for a period of at least one year after termination of employment with AMN, from either ‘directly or indirectly’ soliciting or recruiting, or causing others to solicit or induce, any employee of AMN. This provision clearly restrained individual defendants from practicing with Aya their chosen profession—recruiting travel nurses on 13-week assignments with AMN.” The court further found that a one-year, post-termination restriction preventing a former AMN recruiter from contacting and recruiting a travel nurse on a 13-week assignment with AMN “at a minimum equates to a period of four such assignments for a given nurse. The undisputed evidence thus shows section 3.2 of the CNDA restricted individual defendants’ ability to engage in their ‘profession, trade, or business.'”
In granting summary adjudication, the court rejected AMN’s reliance on Loral Corp. v. Moyes (1985) 174 Cal. App. 3d 268 for the argument that the CNDA was valid because it only prevented non-solicitation of employees (here, travel nurses). Moyes involved the validity of a contractual clause restricting a former executive officer from “raiding” the plaintiffs’ employees. In determining the provision was more like a permissible non-solicitation or nondisclosure agreement and not an invalid non-competition agreement, the court observed that the agreement “restrained [defendant] from disrupting, damaging, impairing or interfering with his former employer by raiding [the plaintiffs’] employees …. This does not appear to be any more of a significant restraint on his engaging in his profession, trade or business than a restraint on solicitation of customers or on disclosure of confidential information.”
The court concluded that Moyes‘s use of a reasonableness standard in analyzing the non-solicitation clause conflicted with Edwards – decided over twenty years later – where the California Supreme Court interpreted Section 16600 to be a “settled public policy in favor of open competition,” and rejected the common law “rule of reasonableness.” Because the Edwards court found section 16600 “unambiguous,” and noted that “if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect,” the court expressed “doubt [as to] the continuing viability of Moyes post-Edwards.”
The court also affirmed the injunction, which prevented AMN and its employees and agents “from using, enforcing, or attempting to enforce any contract or employment agreement in the State of California which purports to restrain its former employees from directly or indirectly soliciting or inducing, or causing others to solicit or induce, any employee of AMN to leave the service of AMN.” In connection with the injunction, the court approved an award of attorney’s fees to defendants under Code of Civil Procedure section 1021.5, which permits fees to be awarded “in any action which has resulted in the enforcement of an important right affecting the public interest if: (a) a significant benefit … has been conferred on the general public or a large class of persons, (b) the necessity and financial burden of private enforcement … are such as to make the award appropriate, and (c) such fees should not in the interest of justice be paid out of the recovery, if any.”
In affirming the award of attorney’s fees, the court concluded that “Defendants clearly were successful parties within the meaning of the statute … the instant action involved an important issue affecting the public interest, namely the enforceability of section 3.2 [of the CNDA, which], if enforced, prevented former AMN employees from recruiting travel nurses and similar professionals who were on temporary assignment with AMN, even if those same travel nurses had applied to, were known by, and/or had previously been placed by, a competitor of AMN, as the instant case aptly shows.” The court further concluded that “instant action conferred a significant benefit on the public … [and] a large class of persons … namely, all current and former AMN California employees who had signed a CNDA containing a non-solicitation of employee provision similar to section 3.2 of the CNDA.”
The AMN Healthcare decision is significant for several reasons. The court’s expressed doubt as to the viability of Loral Corp. v. Moyes should give pause to both employers who regularly include such provisions in employment agreements and practitioners who advise employers as to the inclusion or enforceability of such provisions. While it could be argued the appellate court’s ruling should be limited to its facts because an employee non-solicitation clause easily restrains a recruiter from engaging in their “profession, trade, or business,” the AMN Healthcare court’s reasoning could be extended to other situations. Further, the court’s award of attorney’s fees under Code of Civil Procedure section 1021.5 provides a cautionary tale for employers attempting to enforce contractual provisions that run afoul of Business & Professions Code section 16600. Well-informed defendants will bring a cross-complaint seeking injunctive relief, and, if they prevail, could be entitled their attorney’s fees in doing so.