United States: Second California Court Adopts Position That Employee Non-Solicitation Clauses Are Invalid Restraints On Trade

On January 11, 2019, a California federal district court issued a decision bolstering the argument that employee non-solicitation clauses are unenforceable under California law. In Barker v. Insight Global, the judge declined to interpret narrowly another recent California state court of appeal decision finding that a clause restraining former employees from soliciting former co-workers constituted an unenforceable restraint on trade, and was therefore invalid. In light of these decisions, employers need to carefully consider eliminating such clauses from their employment contracts for employees located in California.   

Prior Cases Addressing Employee Non-Solicitation

In November 2018, the California Court of Appeals held in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc.¹ that an employee non-solicit agreement constituted an unenforceable restraint on trade, which is prohibited under Business and Professions Code Section 16600.² In this case, the court questioned the continuing validity of Loral Corporation v. Moyes,³ which had been persuasive case law for over 30 years. The court in Loral held that an agreement restraining a former executive from raiding his former employer's employees was valid. The Loral court reasoned such an agreement was a reasonable restraint on trade because it only slightly affected the employees—they were not prohibited from seeking employment with the defendant's new employer, but rather, only lost the option of being contacted first by the defendant.

AMN rejected the reasoning of Loral and found that an employee non-solicitation clause as applied to travel nurse recruiters was an invalid and unenforceable restraint on trade. Alternatively, the court ruled that if Loral were still valid, the facts in AMN were distinguishable because the defendant's recruiters were in the business of recruiting and placing travel nurses on a temporary basis in medical facilities. Thus, even if Loral remained good law, the employee non-solicit clause effectively restrained recruiters from engaging in their chosen profession.

This AMN decision had an immediate impact on employers that, in reliance on Loral, had routinely been including employee non-solicitation clauses in their employment contracts, including those subject to California law, and were now forced to abandon or strongly reconsider that practice. In the immediate aftermath of AMN, some commentators questioned whether the decision might subsequently be limited to its facts based on AMN's alternative holding distinguishing Loral and the particular circumstances of the recruiting industry, which raised additional non-competition implications. Thus, the legal community had been eagerly anticipating what some of the first courts to opine on the continuing enforceability of employee non-solicitation clauses would have to say about AMN after that decision was issued.   

Enter Barker v. Insight Global

In Barker, Judge Freeman in the Northern District of California followed AMN and reconsidered and reversed her own ruling dismissing claims based on the defendant requiring employees to execute allegedly unfair and unenforceable employee non-solicitation clauses.⁴  In doing so, court noted that it was "convinced by the reasoning in AMN that California law is properly interpreted . . . to invalidate employee nonsolicitation provisions." Further, the court took pains to reject the notion that the secondary alternative ruling of AMN limited the primary holding: "the Court is not persuaded that the secondary ruling in AMN finding the nonsolicitation provision invalid under Loral based upon those employees' particular job duties abrogates or limits the primary holding." In short, Barker—the first decision issued after AMN—unequivocally followed its more expansive reasoning and rejected the opportunity to limit it to its particular facts, thus reinforcing the argument that employee non-solicitation clauses are unenforceable under California law.  

While the California Supreme Court could eventually weigh in, it is critical for employers to work closely with counsel to manage the risks presented by these decisions. Employers may need to seek guidance not only for the drafting of new agreements, but also for reviewing current or legacy agreements. Employers are going to have to weigh the legal risk of retaining these clauses in some fashion against any perceived benefit in using such clauses to promote a stable workforce. 

Footnotes

1 See Stephen Tedesco and Melissa McDonagh,  The Other Shoe Drops: Court of Appeal Decision Narrows Use of Employee Non-Solicitation Provisions in California, Littler Insight (Nov. 16, 2018).

2 44 Cal. 4th 937, 945 (Cal. 2008).

3 174 Cal. App. 3d 268 (Cal. Ct. App. 1985).

4 Case No. 16-cv-07186-BLF, 2019 WL 176260 (N.D. Cal. Jan. 11, 2019).

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