California Court of Appeals Suggests All Employee Non-Solicitation Agreements Are Unenforceable

California has a strong public policy, codified in Section 16600 of the Business & Professions Code and repeatedly recognized by courts, that prohibits restrictions on employee mobility and competition, except in certain defined situations, as set forth in Sections 16601 and 16602 of the Business and Professions Code. Restrictions prohibiting competition that involves disclosure of trade secrets is also allowed.

In the past, some California courts have recognized certain other non-statutory exceptions to that policy, notably non-solicitation employees and “non-interference” provisions in employee contracts. In recent rulings, however, the courts seem determined to close this judicial loophole and prohibit these provisions as improper restrictions on trade.

Support From Other Recent Court Decisions

In AMN Healthcare v. Aya Healthcare Services, the California Court of Appeal (4th Dist.) evaluated whether an employee non-solicitation clause was invalid under Section 16600. The competing businesses in that case were recruiting firms that placed temporary “traveling nurses” in open positions. AMN Healthcare attempted to enforce non-solicitation agreements against certain recruiters who left its employ to work for its competitor, Aya Healthcare, and subsequently employed nurses whom the recruiters previously placed through AMN.

The Court of Appeal could have narrowly construed its holding that the non-solicitation clauses unreasonably interfered with these former employees’ abilities to engage in their line of work. And while the Court did endorse this rationale at the end of the opinion, it began its analysis by doubting the “continuing viability” of frequently cited California case law to uphold non-solicitation clauses (including the 1985 case of Loral Corp. v. Moyes).

The Court observed that California has rejected standards accepted and used by many other jurisdictions to determine the enforceability of restrictions on trade, and noted that legislation dating back over a century had “settled public policy in favor of open competition, and rejected the common law ‘rule of reasonableness.’” In support, the Court quoted from the 2008 decision in Edwards v. Arthur Andersen LLP that clearly enunciated the position that:

“Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule.”

The Edwards court endorsed a plain meaning interpretation of the word “restrain” to mean “limit” rather than “prohibit” and held that a non-competition agreement not within the specifically enumerated statutory exceptions was unenforceable.

No Distinction for Certain Job Duties

There is a strong argument that because the AMN Court undertook this in-depth analysis of Edwards, the intent was to extend its decision to all employee non-solicitation agreements rather than limiting it to the specific facts of the case. Two federal courts in the Northern District of California have agreed.

In Barker v. Insight Global, a decision from January 2019, the Court stated it was “convinced by the reasoning in AMN that California law is properly interpreted post-Edwards to invalidate employee non-solicitation provisions.” Further, the Court was “not persuaded that the secondary ruling in AMN finding the non-solicitation provision invalid under Loral based upon those employees’ particular job duties abrogates or limits the primary holding.”

Similarly, in an April 2019 opinion in WeRide v. Huang, the Court relied on AMN to reject employee non-solicitation provisions as a violation of Section 16600. “The Court finds the reasoning of Barker and AMN, including their application of Edwards, to be persuasive. [The non-solicitation clause], as a restraint on employment, is invalid.”

In light of these rulings, it is increasingly likely that nearly all employee non-solicits will be deemed unenforceable in California, barring those that fit within the statutory exceptions. Even if such clauses do not directly limit an individual’s ability to practice his or her chosen profession, the restrictions, if imposed, may nonetheless have a chilling effect on opportunities for employment, which provides additional support for public policy arguments against non-solicitation clauses.

(*Prior results do not guarantee a similar outcome.)