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Employers Beware: Using Employee Non-Solicitation Clauses May Violate California Law

A California Court of Appeal on November 1, 2018, affirmed a San Diego trial court’s judgment voiding post-employment non-solicitation of employee contract provisions and enjoining their enforcement. In AMN v. Aya Healthcare __ Cal. App. 4th __, 2018 WL 5669154, the Court also confirmed the award of attorney’s fees to the prevailing former employees and their new employer under California Code of Civil Procedure section 1021.5, which authorizes an award of fees “in the enforcement of an important right affecting the public interest.” 

This decision significantly changes the California legal landscape for employers who use such non-solicitation provisions. Specifically, employers should immediately consider deleting such provisions from existing employment or non-disclosure agreements.  

The AMN Court of Appeal decision is the first published decision rejecting Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985), upon which many California employers had long relied.  Loral had endorsed an “anti-raiding” contractual restraint on the theory that the restraint only “narrowly” and “reasonably” affected competition and mobility by former employees. Invoking the “settled public policy in favor of open competition” articulated by the California Supreme Court in Edwards v. Arthur Andersen, LLP, 44 Cal. 4th 937, 945 (2008), the Court repudiated the Loral decision. 

Although some employers may attempt to distinguish AMN on the ground that the former employees were in the business of recruiting, meaning that enforcement of the non-solicitation provision actually restrained their ability to earn a living, the Court of Appeal’s decision strongly suggests that all such employee non-solicitation clauses may be void and unenforceable under California law. Accordingly, employers who continue to use them risk exposure to individual and class action liability for unfair competition and injunctive relief under California Business and Professions Code section 17200.

Key Takeaways for California Employers

It is possible that the Supreme Court of California will grant review of the AMN decision to determine whether to overrule Loral expressly, as the AMN Court of Appeal could not overrule a sister Court of Appeal’s holding in Loral.  It is also possible for California employers to attempt to distinguish AMN on the ground that the former employers in AMN were in the business of recruiting. The bottom line, however, is that the AMN decision casts considerable doubt regarding the enforceability of employee non-solicitation clauses.

California employers should immediately consider deleting all such provisions with California employees given the substantial risks of liability for unfair competition, injunctive relief and attorney’s fees. Employers who choose to assume the risk of using such provisions should work closely with counsel to modify such non-solicitation provisions to bolster their enforceability in light of the anticipated legal challenges. For example, employers that are not in the business of recruiting who decide to use non-solicitation provisions could include an express acknowledgment that its enforcement will not restrain the employee’s future ability to earn a living. At a minimum, employers who continue to use such non-solicitation provisions after the AMN decision include a “severability” provisions in the hope that a court would sever (delete) an invalid non-solicitation provision from an otherwise enforceable agreement.

If you have questions about this case, please contact Tyler Paetkau at 650.645.9027 or tyler.paetkau@procopio.com, or any member of the firm’s Labor and Employment Group.

 

Tyler M. Paetkau is a Partner in Procopio’s Labor and Employment Law Practice Group in the firm’s Silicon Valley office. He has represented employers in labor and employment law matters for more than 25 years, handling numerous litigation cases. Tyler’s areas of practice include defending employers against claims of wrongful termination, discrimination, retaliation, sexual harassment, defamation, wage and hour violations, unpaid commissions, collective and class actions, and unfair labor practice charges.  Tyler also represents employers in litigation involving unfair competition, misappropriation of trade secrets, restrictive covenants, and employee mobility issues. He also has extensive experience representing employers in union-management labor relations matters, including union organizing campaigns, strikes, and collective bargaining negotiations.