Employee Non-Solicitation Agreements Restricting A Former Employee’s Ability To Solicit Other Company Employees May Be Invalid As A Result Of Recent Court Opinions
Employee Non-Solicitation Agreements Restricting A Former Employee’s Ability To Solicit Other Company Employees May Be Invalid As A Result of Recent Court Opinions
Since 1985, employers have relied on the California Court of Appeal decision in Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985), to support the validity of provisions in agreements with their employees that prohibit the employees from soliciting other employees to leave the company for a specified period after their employment terminates (sometimes referred to as “anti-raiding covenants”). Though the Loral court recognized certain limits on employers’ ability to restrain employees post-employment as a result of California Business & Professions Code § 16600 (“Section 16600”), it upheld the post-term anti-raiding restriction at issue and explained: “The restriction presumably was sought by plaintiff in order to maintain a stable work force and enable the employer to remain in business. This restriction has the apparent impact of limiting [defendant’s] business practices in a small way in order to promote [plaintiff’s] business. This noninterference agreement has no overall negative impact on trade or business.” Id. at 280.
In 2008, the seminal California Supreme Court opinion Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), was issued, the result of which was that except for certain limited and specific exceptions, employee non-competition agreements are unenforceable in California. The basis for the Court’s ruling was Section 16600, which provides: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The Edwards Court found this language unambiguous, and in doing so expressly rejected the narrow-restraint exception to Section 16600 that certain Ninth Circuit cases had supported. Id. at 948-50. The Edwards Court did not address employee non-solicitation agreements, nor did it refer to Loral.
In the decade after Edwards, courts continued to rely on Loral, notwithstanding Edwards, to uphold anti-raiding covenants in the face of challenges by litigants that they are void under Section 16600. See e.g., Sunbelt Rentals, Inc. v. Victor, 2014 U.S. Dist. LEXIS 14416, *30 (N.D. Cal. Feb. 5, 2014); Sonic Auto., Inc. v. Mohammed Younis, 2015 U.S. Dist. LEXIS 190427, *4, *5 (C.D. Cal. May 6, 2015); cf. First Fin. Sec., Inc. v. Freedom Equity Grp., LLC, 2017 U.S. Dist. LEXIS 133551, *19 (N.D. Cal. Aug. 21, 2017) (“[I]t is not clear whether the particular non-solicitation provision is void under California law . . . . The court observes without deciding that courts do not all agree that such clauses are invalid.”) (citations omitted).
In late 2018, however, the tide began to shift markedly away from upholding the enforceability of anti-raiding provisions that apply post-termination of employment. Since then, several courts have squarely addressed the continued validity of Loral in light of Edwards and in doing so have found, or at least suggested, that anti-raiding covenants that operate post-employment violate Section 16600.
In November 2018, the California Court of Appeal in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018), found a post-employment non-solicitation provision in agreements the employer had with its nurse recruiters was void under Section 16600. The Court questioned the continued validity of Loral, stating its “use of a reasonableness standard in analyzing the nonsolicitation clause there at issue . . . appears to conflict with Edwards’s interpretation of section 16600, which, under the plain language of the statute, prevents a former employer from restraining a former employee from engaging in his or her ‘lawful profession, trade, or business of any kind,’ absent statutory exceptions . . . .” Id. at 938 (citing Edwards) (emphasis in Court’s opinion). The Court explained: “Our conclusion is further buttressed by the Edwards court’s refusal to adopt the ‘limited or ‘narrow restraint’ exception to section 16600 created by the Ninth Circuit . . . .” Id. (citing Edwards). However, the Court goes on to state that its decision also finds support in the particular facts of the case. It explains that “[u]nlike the former employee in [Loral], who was an executive officer of the plaintiff employer, in the instant case individual defendants were in the business of recruiting and placing on a temporary basis medical professionals . . . in medical facilities . . . . If enforced, [the nonsolicitation provision] thus restrained individual defendants from engaging in their chosen profession, even in a ‘narrow’ manner or a ‘limited’ way.” Id. at 939 (citing Edwards) (emphasis in original).
In 2019, two federal judges sitting in the Northern District of California relied on AMN to find post-employment anti-raiding provisions invalid without relying on the secondary rationale of AMN, i.e., the profession of the restrained employees.
In Barker v. Insight Global, LLC, 2019 U.S. Dist. LEXIS 6523 (N.D.Cal. Jan. 11, 2019), plaintiff claimed his former employer enforced an unlawful employment agreement. Initially, the Court determined that his claims related to the non-solicitation of employees provision in the agreement at issue failed to state a claim, but it reconsidered and reversed its ruling due to the intervening decision in AMN. The Court was “convinced by the reasoning in AMN that California law is properly interpreted post-Edwards to invalidate employee nonsolicitation provisions.” It went further and made clear that it did not find the nature of the business at issue relevant, stating: “[T]he Court is not persuaded that the secondary ruling in AMN finding the nonsolicitation provision invalid under Loral based on the employees’ particular job duties abrogates or limits the primary holding.”
A couple months later, in Weride Corp. v. Huang, 2019 U.S. Dist. LEXIS 55996 (N.D. Cal. April 1, 2019), a second judge in the Northern District of California reached the same conclusion in the context of a ruling on a motion for a preliminary injunction, finding an anti-raiding covenant that operated post-termination of employment was void under Section 16600. Id. at *32-33. The Court also was presented with the issue of whether plaintiff would likely succeed on the merits as to its theory that the former employee breached the provision that restricted him from soliciting employees during the term of his employment, but declined to consider it because the employee no longer worked at the company and thus the Court could not construct injunctive relief to preserve the status quo on this issue in any event.
The likelihood that post-employment anti-raiding provisions will be upheld is notably less today than it was six months ago. However, the issue is not settled and employers should continue to monitor how the law develops in this area. The recent caselaw that most clearly rejects anti-raiding covenants that apply post-termination is from federal courts. The California Court of Appeal in AMN did question the continued validity of Loral post-Edwards, however there is still some room to argue that it was limited to its facts, namely, the context of employees who were in the business of recruiting. Further, none of these cases decide that in-term restrictions on soliciting employees of the company are invalid. Thus, employers are on stronger footing relying on and enforcing prohibitions on raiding employees during the term of its employees’ employment and have other sources of law to support those arguments. See e.g., Cal. Labor Code § 2863 (“An employee who has any business to transact on his own account, similar to that entrusted to him by his employer, shall always give the preference to the business of the employer.”); Stokes v. Dole Nut Co., 41 Cal. App. 4th 285, 295 (1995) ("[d]uring the term of employment, an employer is entitled to its employees’ 'undivided loyalty.'”) (citations omitted).
Given the uncertainty concerning the enforceability of anti-raiding covenants, employers should carefully review any such agreements they have with their employees. We recommend that to the extent an employer decides to retain such provisions, it make sure they are easily severable should a court ultimately find them void. To that end, we recommend that employers who elect to include anti-raiding provisions in agreements recite them in a stand-alone provision, and include a provision in any such agreement stating the parties’ preference that in the event any term of the agreement is determined to be unenforceable or contrary to any applicable law or policy, such term or provision will be effective to the maximum extent permitted by law and the same will not affect any other term or provision of the agreement, which will otherwise remain in full force and effect.