On November 1, 2018 the California Court of Appeal for the Fourth Appellate District found that a provision in a Confidentiality and Nondisclosure Agreement, which prohibits employees from recruiting co-workers to leave the company for one year after termination, is void as an unlawful restraint of trade in violation of California Business & Professions Code §16600. The appellate court in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 2018 Cal. App. LEXIS 989 thus held that the nurse placement agency could not prohibit nurse recruiters who worked for it from soliciting its nurse employees after the recruiters terminated their employment.
Although California law has steadfastly refused to enforce non-competition agreements against former employees, this is the first California appellate ruling which directly addresses the solicitation of former co-workers since the 1984 ruling in Loral Corp. v. Moyes (1985) 174 Cal.App.3d, 268 [219 Cal. Rptr. 836] (Loral).
In Loral, the court upheld a similar provision finding that the "restriction only slightly affects [the plaintiffs'] employees" and did not appear to be "a significant restraint on [the employee] engaging in his profession, trade or business." (Loral, supra, 174 Cal.App.3d at p. 279.) The Loral ruling was seriously put into question by the 2008 decision of the California Supreme Court in Edwards v. Arthur Andersen LLP (2008)] 44 Cal.4th 937 [81 Cal. Rptr. 3d 282] (Edwards) which rejected the rationale underlying the ruling in Loral. Edwards clearly rebuked non-competition agreements which were not covered by one of the few statutory exceptions to Business & Professions Code § 16600. However, Edwards did not directly address prohibitions on the recruitment of employees after termination (sometimes referred to as anti-raiding provisions), and Loral remained good law routinely followed by the trial courts, with rare exceptions.
The exact question has now been put before an appellate court in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. and the court declined to follow Loral. The court noted that Loral was decided several years before Edwards and that the Edwards court refused to adopt the "limited" or "narrow-restraint" exception to section 16600 found in Ninth Circuit decisions. The court thus stated that it "doubt[ed] the continuing viability of [Loral] post-Edwards." However, the court also determined that even if Loral's use of a reasonableness standard survived Edwards, the case was distinguishable because AMH's contract represented a greater restraint on the recruiters' ability to engage in their chosen profession than was present in Loral. On that basis, the court stated that it thus "independently conclude[d]" that the anti-raiding provision is void under section 16600.
AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. represents a serious potential blow to the continued enforceability of anti-raiding provisions in the employment context. The factual circumstances of the case may be considered somewhat unique in that the nurses being recruited by the former employees were both employees and customers. The court also felt the need to distinguish the facts of Loral from the case before it. However, this case represents a direct application of the Supreme Court's rationale in Edwards to an anti-raiding provision, resulting in a finding that it is unenforceable.
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