Daily Blast - November 21, 2018 - Lewis Brisbois Bisgaard & Smith LLP

Non-Solicitation Provisions in California Headed for Extinction?

Recently, the appellate court in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., et al., No. D071924, 2018 Cal. App. LEXIS 989, at *20 (Ct. App. Nov. 1, 2018) held that a broadly worded non-solicitation provision, which prevented defendants from recruiting any of plaintiff’s employees, was void pursuant to Business & Professions Code section 16600. (Id. at p.*20.) The provision restrained defendants from practicing their chosen profession in violation of California law. (Ibid.)

Plaintiff AMN Healthcare, Inc. (“AMN”) and defendant Aya Healthcare Services, Inc. (“Aya”) were competitors that each provided traveling nurses to medical facilities throughout the country. AMN sued Aya and former AMN recruiters, who went to work for Aya, because the recruiters had signed a confidentiality and non-disclosure agreement when they left AMN preventing them from soliciting any employee of AMN to leave AMN for at least a one-year period.

The AMN decision rejected even limited restrictions on trade by non-solicitation provisions. Although many states follow the common law “rule of reasonableness” and permit reasonable restraints on the practice of a trade or occupation, California’s statutory scheme voids noncompetition agreements unless they are specifically authorized by Business & Professions Code sections 16601 or 16602. (Id. at p.*18.) On this basis, AMN disapproved Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, which applied a reasonableness standard to non-solicitation provisions and permitted limited restrictions on trade. (Id. at p.*24-25.) In Loral, the court upheld an agreement restraining a former executive officer from corporate raiding because the provision tended more to promote than restrain trade. (Ibid.)

Doubting the continuing viability of Loral, AMN instead followed the Supreme Court opinion in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937. (Id. at p.*24-25.) Edwards found section 16600 “unambiguous,” noting that “if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.” (Id. at p.*24.) Further, it was up to the “Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.” The Edwards Court opted not to dilute the public policy of section 16600 by judicial fiat.

Even if Loral survived Edwards, AMN distinguished Loral. In Loral, corporate executives were restrained from raiding employees whereas in the instant case defendants who were in the business of recruiting and placing traveling nurses nationwide were restrained. (Id. at p.*26.) The provision thus would impermissibly restrain the defendant recruiters from their practicing their trade. (Ibid.) In light of this opinion, we should advise our clients that non-solicitation provisions should no longer be used in California based contracts.