News & Updates: Courts Reject Non-Solicitation Agreements Under California Law

Since the California Supreme Court ruled in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) that California law bars essentially all employee covenants not to compete, some have wondered whether “non-solicitation agreements” or clauses – barring individuals from trying to hire former coworkers away from their prior employers – were still permitted.

Case law previously had been interpreted to permit this type of agreement, such as in Loral Corp. v. Moyes, 174 Cal. App. 4th 268 (1985), but no court had specifically looked at the issue post-Edwards – until recently. Now, three courts in the last six months have drawn the legality of all non-solicitation agreements in California into question.

First, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5^th 923 (2018), the California Court of Appeal held that a non-solicitation agreement affecting travel nurse recruiters would impermissibly restrain the recruiters in their profession – hurting their business prospects and salary – and found the agreement unenforceable under California Business and Professions Code Section 16600. Section 16600 provides, with limited exceptions, “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 California Supreme Court read this statute expansively in Edwards, which drove the AMN court’s decision. At the same time, however, there was some indication that the reasoning was limited to the facts of the case, which dealt with a specific profession – recruiters.

Post-AMN, two federal courts in the Northern District of California have weighed in on the issue, concluding that essentially all non-solicitation agreements are void under California law and refusing to enforce them. Those decisions are:

• Barker v. Insight Glb., LLC (N.D. Cal.) (“Having considered the AMN decision and reviewed Loral and Edwards, the Court is convinced by the reasoning in AMN that California law is properly interpreted post-Edwards to invalidate employee nonsolicitation provisions.”)
• WeRide Corp. v. Huang (N.D. Cal.) (approving of Barker, and holding that “California law is properly interpreted post-Edwards to invalidate employee nonsolicitation provisions.”)

These decisions further underscore the risk of a legal challenge to all non-solicitation agreements – not just for those in the recruiting industry.

Employers should be aware that any invalid provisions could present legal problems, not only if the employer attempts to enforce them, but also if such clauses are simply contained in any agreement.

What should employers do?

Remember that Section 16600 applies very broadly in California: any restrictions on trade – whether through covenants not to compete or promises not to hire from former employers – are very risky. While the California Supreme Court has still not weighed in on whether all non-solicitation agreements are barred, leaving the law in flux, we recommend that clients review all such clauses in employment documents. The continuing use of such provisions carries significant legal risks. Of course, employers can still protect confidential, trade secret and proprietary information, however, those provisions should be drafted carefully to avoid conflict with Section 16600.