United States: Time To Reconsider California Employee Non-Solicitation Provisions

California has long been known as a state that bans post-employment non-compete and customer non-solicitation agreements for its employees, absent very limited exceptions related to the sale of a business and trade secret protection. Employee non-solicitation provisions were believed to be the last post-employment restrictive covenant that California law still generally allowed, assuming they were properly drafted. Now, because of two recent California court decisions, even inclusion of limited employee non-solicitation provisions needs to be reconsidered.

The legal landscape until November 2018

Within its Business and Professions Code, California has a specific legislative ban on provisions that restrain anyone from engaging in their lawful profession. In 2008, the California Supreme Court in Edwards v. Arthur Andersen LLP specifically held that post-employment non-compete and customer non-solicitation provisions were disallowed under California law regardless of their scope or reasonableness. Because of the California Supreme Court's silence as to employee non-solicitation provisions, the legal consensus has largely been that California decisions pre-Edwards, which allowed limited employee non-solicitation provisions, were likely still good law. In particular, the 1985 California Court of Appeals decision Loral Corp. v. Moyes allowed a one year post-employment employee non-solicitation provision. Therefore, these provisions have remained staples of California employment agreements.

The AMN Healthcare decision

On November 1, 2018, the California Court of Appeals in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. was the first court to cast doubt on the enforceability of these employee non-solicitation provisions. In its decision, the court initially discussed how, because of California's antipathy toward any post-employment restrictive covenants and the California Supreme Court's reasoning in Edwards, it "doubt[s] the continuing viability of Moyes [and employee non-solicitation provisions] post-Edwards." The court then went on to state that "[e]ven if Moyes . . . survived Edwards, we find Moyes factually distinguishable from our case." The court noted that, because the workers at issue before it were employed as recruiters, a ban on employee raiding for recruiters is akin to a customer non-solicitation. Therefore, the court in AMN Healthcare "independently conclude[d]" that the employee non-solicitation provisions at issue were void.

The Barker decision

Although the explicit holding of AMN Healthcare could be interpreted to only apply to recruiters, one California Federal District Court interpreted the AMN Healthcare decision broadly. In Barker v. Insight Global LLC, the court allowed an Unfair Competition Law claim based on the employer requiring its employees to sign employee non-solicitation provisions to move forward. The court in Barker based its holding on the AMN Healthcare opinion and the idea that the Moyes decision did not survive post-Edwards. In fact, the court in Barker explicitly rejected the idea that the holding in AMN Healthcare was limited to recruiters.

What this means for employers

Employers should re-examine the inclusion of employee non-solicitation provisions in their California employment agreements. This includes not only offer letters and employment contracts, but also severance and settlement agreements. Although the Federal District Court decision in Barker is not binding authority under California law, it will be cited by the plaintiff's bar when challenging non-solicitation clauses and may be indicative of how other courts could interpret the issue. Importantly, the Barker decision shows that including employee non-solicitation provisions does more than just risk invalidity of these provisions. The inclusion also could lead to independent Unfair Competition Law claims against the employer. Accordingly, until the California Supreme Court decides this issue, the utility and necessity of employee non-solicitation provisions will have to be balanced against the associated uncertainty and potential legal risk.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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