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Attorneys


Employee Non-Solicitation Provisions Under Attack

February 28 2019

 

by James Kachmar
The IP Law Blog

Companies have a number of tools available to them to help protect their intellectual property, including trade secret and other proprietary information that give them a competitive advantage. Many employers utilize detailed provisions in their employee handbooks and employment agreements to protect this information. One key provision has been the use of coworker non-solicitation provisions that prevent a departing employee from seeking to “raid” his or her former coworkers to join him or her at their new place employment, usually a business competitor.

Generally, these provisions state that an employee agrees during their employment, and for some period after their employment ends (usually one year), that he or she will not solicit any former coworkers to seek employment with their new employer. Now, some recent case law has brought the use of these non-solicitation provisions into question as possibly violating section 16600 of California’s Business and Professions Code, which prohibits the use of non-compete provisions except in certain limited circumstances.

For years, California courts have recognized the right of employers to use non-solicitation provisions in employment agreements to prevent employees from “soliciting” their coworkers to join them at a new employer.  For instance, in 1985, a California appellate court in Loral Corp v. Moyes, 174 Cal.App.3d 268 (1985), held that a non-solicitation of fellow employees provision in an employment agreement was lawful because the co-workers were free to seek employment with a competitor, they just couldn’t be contacted first by the departing employee. (As opposed to non-solicitation provisions that have been routinely upheld, courts have held that “no-hire” provisions, i.e. that a departing employee could not hire a former co-worker, have been held unenforceable as an invalid non-compete in violation of section 16600.)

The enforcement of non-solicitation of co-worker provisions remained relatively consistent until November 2018 when a court in AMN Healthcare, Inc. v. Aya HealthCare Services, Inc., 28 Cal.App.5th 923, granted judgment against an employer who was attempting to enforce a co-worker non-solicitation provision against former employees. In AMN, the departing employees were recruiters for temporary nurses who left AMN to join a competitor in the industry. AMN sued the competitor and former employees claiming they had violated a contractual provision not to solicit or recruit their former co-workers, i.e. the nurses being hired for temporary nursing assignments.

The Court affirmed summary judgment in favor of the competitor and former employees, holding that the co-worker non-solicitation provision violated section 16600 of the California Business and Professions Code, which provides that agreements that restrain a person’s trade or profession are unenforceable.  The AMN Healthcare Court relied heavily on the California Supreme Court’s ruling in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), which broadly struck down non-compete agreements preventing employees from competing against their former employers.

It remained an open question following the AMN Healthcare decision whether other courts would follow its holding concerning the unenforceability of an employee non-solicitation provision.  For instance, would other courts limit the AMN holding and decline to follow it because:

(1) The former employees who were being sought to be restrained by AMN were recruiters such that any prohibition on solicitation would necessarily restrain them in their profession as recruiters; or

(2) The former co-workers they were targeting for recruitment were temporary nurses who served short assignments so that enforcing the non-solicitation provision could limit those employees’ ability to obtain new work after their temporary assignments ended.

We did not have to wait long to see what other courts would do. Two months after the AMN decision, another court followed the lead of the AMN Healthcare Court and is allowing a claim to go forward attacking a co-worker non-solicitation provision.  In Barker v. Insight Global, LLC (Jan. 11, 2019 N.D. Cal.), Judge Beth Labson Freeman recently reversed herself and granted the plaintiff-employee’s motion for reconsideration to allow him to state a claim as a class representative against his former employer for the use of co-worker non-solicitation provisions in its employment agreements.

Judge Freeman held that the recent AMN Healthcare decision (her initial order dismissing the claim came three months prior to the AMN Healthcare decision) was likely consistent with the current state of California law regarding these non-solicitation provisions, especially in light of the Edwards v. Arthur Andersendecision. She denied the defendant-employer’s motion to dismiss the former employee’s claim and ruled that plaintiff should be allowed to present a claim that the use of an employee non-solicitation provision in his employment agreement violated section 16600 and was therefore an unfair business practice.

The Barker case is still in the early stages but employers should be concerned that a court has decided to follow the holding of the AMN Healthcare decision. In light of these recent developments, employers should carefully review any non-solicitation provisions in their employment agreements with their attorneys to determine whether they are at risk at facing claims or a result similar to those in the AMN Healthcare and Barker cases.

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See more writing about intellectual property, copyright, patent, and trademark law on The IP Law Blog