October 20, 2021

Volume XI, Number 293

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October 19, 2021

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October 18, 2021

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Ninth Circuit Denies Sherman Act Challenge To No-Poach Provision

In an important decision on August 19, 2021, the Ninth Circuit Court of Appeals in Aya Healthcare Services, Inc. v. AMN Healthcare, Inc. affirmed the grant of summary judgment in favor of AMN, finding that the non-solicitation provision in the parties’ agreement was not an unreasonable restraint in violation of the federal antitrust law known as the “Sherman Act.”  Instead, the Court ruled that the non-solicitation provision was “reasonably necessary to the parties’ pro-competitive collaboration” and that Aya failed to show the non-solicitation provision had a “substantial anticompetitive effect.”[1]

AMN is a leading provider of travel nursing services, which provide temporary nursing assignments to short-staffed hospitals and other healthcare facilities.  As AMN grew, it became unable to fulfill the demands of its hospital customers and began referring “spillover” assignments to its network of subcontractors and associate vendors (AVs).  To receive such spillover assignments, Aya (a competitor who also provides temporary nursing services) signed a contract with AMN in 2010 and included in that agreement was a non-solicitation provision prohibiting Aya from soliciting or “poaching” AMN’s employees.

In 2015, however, Aya began actively soliciting AMN’s travel nurse recruiters which led AMN to terminate the parties’ agreement.  Aya filed suit in 2017 alleging that the non-solicitation provision in the parties’ contract was an unreasonable restraint on trade in violation of Sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§1, 2 and related California state law claims.  The district court granted summary judgment in favor of AMN on the Sherman Act claims, finding that Aya failed to raise a genuine issue of material fact that AMN wielded market power and declining jurisdiction over Aya’s state law claims.[2]

On appeal, the Ninth Circuit observed that two different standards are used to analyze whether a particular restraint on trade is unlawful under the Sherman Act.  Under the per se standard, a restraint on trade is per se unlawful if it “always or almost always tends to restrict competition and decrease output.”[3]  Such “naked” restraints on competition are conclusively presumed to be unlawful because of their “pernicious effect” on competition and “lack of any redeeming virtue.”[4]  If, however, the restraint on trade is (1) subordinate or collateral to a “legitimate transaction” and (2) “reasonably necessary” to achieving that transaction’s pro-competitive purpose, then the restraint is exempt from the per se rule and analyzed under the so-called “rule of reason.”  To determine whether a restraint on trade violates the rule of reason, courts employ a three-part, burden-shifting test:  (1) first, the plaintiff has the burden of proving that the restraint has a substantial anticompetitive effect that harms consumers in the relevant market; (2) if the plaintiff carries its initial burden, then the burden shifts to the defendant to show a pro-competitive rationale for the restraint; and (3) if the defendant makes this showing, then the burden shifts back to the plaintiff to demonstrate that the pro-competitive benefits could be reasonably achieved through less restrictive means.[5]

Here, Aya did not challenge the district court’s finding that the non-solicitation provision was subordinate or collateral to the primary purpose of the collaboration agreement, which was to fulfill the unmet demand of hospitals for travel nurses, and which was a pro-competitive purpose.  Instead, Aya argued that the non-solicitation provision was not reasonably necessary to achieving that purpose because it was permanent and outlived the parties’ collaboration.  The Ninth Circuit, however, disagreed and ruled that the non-solicitation provision was reasonably necessary to supplying hospitals with travel nurses “because it ensures that AMN will not lose its personnel during the collaboration.”[6]  Because the Ninth Circuit found that the non-solicitation clause was an ancillary restraint against competition, it proceeded to analyze the clause under the rule of reason.

Ultimately, the Court found that Aya failed to carry its burden under the first prong of the rule-of-reason test because Aya failed to demonstrate that “a triable issue of fact exists with respect to harm to competition.”[7]  In particular, the Court found that Aya failed to offer evidence that higher prices in relevant markets were attributable to the non-solicitation provision; and (2) Aya’s expert’s testimony was flawed because his “market share calculations capture[d] AMN’s direct placements of traveling nurses even though [those placements] did not involve AMN collaborating with and imposing non-solicitation covenants on AVs” like Aya.[8]  Additionally, the Ninth Circuit found that Aya failed to show any evidence that AMN exercised “market power” in a relevant market that resulted in “harm to competition.”[9]

For these reasons, the Ninth Circuit concluded that Aya failed to carry its initial burden in the rule-of-reason analysis and upheld the validity of AMN’s non-solicitation provision.  The AMN Healthcare decision sheds important light on the contours of federal antitrust challenges to non-solicitation provisions, but it does not address whether and how these provisions should be construed under state competition laws, such as California Business and Professions Code section 16600 (which generally prohibits non-compete agreements).[10]

FOOTNOTES

[1] Aya Healthcare Services, Inc. v. AMN Healthcare, Inc., No. 20-55679 (9th Cir. Aug. 19, 2021), D.I. 101-1, Opinion and Order at 12, 19.

[2] Aya Healthcare, D.I. 101-1 at 7.

[3] Id. at 9-10.

[4] Id. at 10.

[5] Id. at 15

[6] Id. at 12.

[7] Id. at 15-16.

[8] Id. at 16-17.

[9] Id. at 18.

[10] See, e.g., DePuy Synthes Sales, Inc. v. Stryker Corp., 2020 WL 6205702, at *9 (C.D. Cal. Sep. 29, 2020) (“Under the general rule in California, covenants not to compete are unenforceable.”).

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 258
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About this Author

James Fazio Intellectual Property Attorney Sheppard Mullin Law Firm
Special Counsel

James Fazio is special counsel in the Intellectual Property Practice Group in the firm's San Diego (Del Mar) office.

Areas of Practice

James focuses on intellectual property and business litigation. He represents public and private companies in disputes such as those involving patent and trademark infringement, theft of trade secrets, fraud, breach of contract, unfair competition, false advertising and various business tort claims. James has more than 24 years of litigation experience and was selected by his peers among the top ten intellectual property...

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