California courts mostly take a no prisoners approach to Business and Professions Code section 16600, the statute prohibiting illegal restraints on trade. Courts broadly interpret Section 16600, which states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void,” to invalidate most post-employment non-competes and customer non-solicits, including covenants preventing former employees or their new employers from “hiring” employees of a former employer (so-called “no hire agreements”). But Section 16600 does not bar all post-employment covenants–just those that “restrain” trade.
Employee Non-Solicits and Loral Corp. v. Moyes
For the last thirty-three years, California courts have been willing to enforce post-employment restrictions on employee solicitation. Such provisions typically prohibit former employees from actively soliciting (but not from actually hiring) the current employees of their former employers. See Loral Corp. v. Moyes.
In Loral, the Sixth Appellate District of the California Court of Appeal concluded that employee non-solicits do not create actionable restraints on trade under Section 16600 because the employees “restrained” remain free to contact their former employer’s employees for reasons unrelated to solicitation, or to hire them if they sought employment independently. All they lost was the option of being solicited (i.e., contacted by their former colleagues first). Notwithstanding its 1985 vintage and interim California Supreme Court case law narrowing Section 16600 exceptions in other contexts (see Edwards v. Arthur Andersen LLP), Loral has remained the leading authority on this issue for longer than most of us have been practicing law.
But is change blowing in the wind?
Earlier this month, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., a different district of the California Court of Appeal declared that it “doubt[ed] the continuing viability” of Loral following the California Supreme Court’s 2008 Edwards’ decision. Several commentators have since interpreted AMN Healthcare to mean that post-employment employee non-solicits are no longer viable in California. But just as the report of Mark Twain’s death was famously exaggerated, perhaps too are the reports of AMN Healthcare’s impact on employee non-solicits.
While AMN Healthcare undoubtedly looked askance at Loral, the Fourth Appellate District did not ultimately abrogate employee non-solicits. Instead, the court found that regardless of whether Loral survived Edwards, Loral was distinguishable on its facts. The plaintiff employer in AMN Healthcare sought to apply its employee non-solicits to employees whose very job it was to recruit and place temporary medical professionals in medical facilities throughout the country. The employee non-solicit therefore was a “de facto” customer non-solicit and non-compete, and as applied, it prevented the employees in question from doing their jobs (from “engaging in their chosen profession”). This distinction is crucial. While a typical employee does not solicit other employees as part of his or her primary job function, a recruiter certainly does.
Those who rushed to pronounce the end of employee non-solicits may not have considered that Edwards was issued 10 years ago. Since then, California courts have consistently upheld properly drafted employee non-solicitation covenants, notwithstanding Edwards. See, e.g., Barker v. Insight Glob., LLC (“The Court finds that the above holding of Loral is not overruled by Edwards.”); Arthur J. Gallagher & Co. v. Lang (contrasting Edwards and Loral). These courts recognize that Edwards analyzed customer non-solicitation covenants and not employee non-solicits, and therefore never reached the issue addressed in Loral. The Edwards court noted this limitation on it holding because the plaintiff did not “contend that the provision of the noncompetition agreement prohibiting him from recruiting [the defendant’s] employees violated section 16600.”
So what does this mean for your business?
As Mark Twain noted, “A successful book is not made of what is in it, but of what is left out of it,” and it is too early to sign the death certificate for employee non-solicitation covenants in California. Notwithstanding, we part with a few takeaways:
- “Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect).” Employers should consider what they gain from employee non-solicits–are the provisions included as boilerplate that may serve only to increase litigation risk? Or, do they substantially protect against raiding, loss of investment in employees, or other material assets?
- Stay tuned, as only time (and litigation) will tell, as California courts continue to address the enforceability of employee non-solicitation covenants under differing factual scenarios.
- If your business involves soliciting employees, recruiting or similar work, consider whether your standard employee non-solicits require amendment in light of AMN Healthcare.
For more, please reach out to your Baker McKenzie employment lawyer.