Validity of Employee Nonsolicitation Agreements Now in Question

California, unlike most of the rest of the United States, generally prohibits noncompetition agreements except in very limited circumstances involving the sale of a business. (See Business & Professions Code § 16600 et seq.) But California also recognizes an employer’s right to protect its trade secrets. (See Civil Code § 3426 et seq.) As a result, in California, a former employee’s right to compete with his or her former employer frequently comes into conflict with the employer’s right to protect its trade secrets, and often results in litigation. It is not unusual for the new employer to also become embroiled in the litigation.

For over 30 years, it was generally thought that an employer could prevent its current and former employees from using its trade secret information to solicit its customers and employees, without running afoul of California’s prohibition against noncompetition agreements. For example, in Loral Corp. v. Moyes, 174 Cal.App.3d 268 (1985), a former company officer was subject to an agreement to preserve the confidentiality of all trade secrets and prohibited from disrupting or interfering with the business by raiding its employees or disrupting its relationships with customers. The company sued the former officer for violation of that provision and the court held that the provision did not constitute an invalid restriction on the former employee’s ability to compete. However, in American Credit Indemnity Co. v. Sacks, 213 Cal.App.3d 622 (1989), the court of appeal ruled that when a former employee sends out an announcement of her new employment to customers on a trade secret list, that does not constitute a misappropriation of the employer’s trade secret list as long as she does not actually solicit business from those customers.

AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., Case No. D071924 (4th Appellate District, November 1, 2018) is the most recent appellate decision arising from a claim by an employer that its former employees are misappropriating its trade secret information. AMN was in the business of recruiting nurses for temporary assignments at hospitals and other healthcare organizations. AMN treated those temporary nurses as its employees. AMN’s employees who did the recruiting were subject to a Confidentiality and Non-Disclosure Agreement that, among other things, prevented the employees from soliciting any AMN employee to leave AMN for at least a year. Several AMN employees left and went to Aya Healthcare Services, which was also in the business of recruiting and placing temporary nurses. AMN sued both its former employees and Aya. Ultimately, the trial court granted summary judgment for the former employees and Aya, and enjoined AMN from enforcing its employee nonsolicitation provision. On appeal, the court of appeal affirmed the trial court’s rulings.

In reaching its decision, the court of appeal in AMN Healthcare concluded that the employee nonsolicitation provision violated Business and Professions Code section 16600 and was therefore void. The court engaged in a detailed analysis but, most importantly, the court said, “This provision clearly restrained individual defendants from practicing with Aya their chosen profession – recruiting travel nurses . . . .” (Slip Opinion, at 16.) The court also questioned the continuing validity of the 1985 decision in Loral Corp. v. Moyes.

The facts of AMN Healthcare are unusual in one very important respect: AMN’s former employees were in the business of recruiting the very employees that they were accused of soliciting – temporary nurses. Therefore, preventing them form soliciting temporary nurse employees obviously restricted their ability to compete with AMN. This fact distinguishes the case from the garden-variety situation in which, say, the current and former employers both make widgets. In that situation, preventing a former employee from soliciting its widget makers and widget sellers does not significantly limit the former employee’s ability to compete in the widget business. One might therefore conclude that in the garden-variety situation an employee nonsolicitation agreement is not an unlawful noncompetition agreement. Nonetheless, the broad-stroke language and analysis in AMN Healthcare calls into question all employee and customer nonsolicitation agreements. Therefore, companies should consult with their employment counsel to determine whether it makes sense to remove such provisions from their employee policies, practices and agreements or, alternatively, whether the facts and circumstances of their business, and the trade secret nature of the information they seek to protect, justify their nonsolicitation agreements.

Employee Cannot Pursue PAGA Claims Against Employer After Settling Individual Claims

In one of the final judicial decisions of 2017, a California court of appeal has held that an employee who settled his individual wage and hour claims against his former employer could not continue to pursue his PAGA claims against that employer. The court therefore affirmed the trial court’s judgment dismissing the employee’s PAGA claims. Kim v. Reins International California, Inc., 2d Dist. Case No. B278642 (filed December 29, 2017).

The Plaintiff, Justin Kim, sued his former employer, Reins International California, Inc. (“Reins”) alleging individual and class claims for wage and hour violations and seeking civil penalties on behalf of the State of California and aggrieved employees under the Labor Code Private Attorneys General Act of 2004 (“PAGA”). Mr. Kim had signed an arbitration agreement at the commencement of his employment; therefore, Reins moved to compel arbitration of Mr. Kim’s individual claims, dismiss his class claims, and stay his PAGA cause of action until the arbitration had concluded. The trial court granted the motion. While the arbitration was pending, Mr. Kim accepted Reins’ offer to compromise under Code of Civil Procedure section 998. As a result, Mr. Kim dismissed his individual claims with prejudice and dismissed the class claims without prejudice, leaving only the PAGA cause of action.

Reins filed a motion for summary adjudication of the PAGA cause of action, arguing that after Mr. Kim dismissed his individual causes of action he was no longer an “aggrieved employee” under PAGA and therefore could not longer pursue the PAGA cause of action. The court granted the motion. Mr. Kim appealed.

PAGA provides that an action may be brought by “an aggrieved employee on behalf of himself or herself and other current or former employees.” Labor Code section 2699(a). The term “aggrieved employee” “means any person who was employed by the alleged violator against whom one or more of the alleged violations was committed.” Labor Code section 2699(c). The court concluded that once Mr. Kim settled his individual claims and dismissed them with prejudice, he was no longer an “aggrieved employee” as defined in Labor Code section 2699, so he no longer had standing to maintain his PAGA action.

The court noted that Mr. Kim’s inability to pursue his PAGA cause of action, because he was no longer an “aggrieved employee,” would not prevent any other aggrieved employee from bringing a PAGA action against Reins. The court rejected Reins’ suggestion that the trial court’s dismissal with prejudice of Mr. Kim’s PAGA cause of action was a “decision on the merits” that would bar any other employee from bringing a PAGA claim against Reins.

The decision in Kim v. Reins International California, Inc. is not surprising, but suggests a likely employer strategy for trying to avoid liability under PAGA. That strategy depends on the employer’s ability to settle a plaintiff employee’s individual wage and hour claims. Such a strategy may be pursued regardless of whether the employee is subject to mandatory arbitration of his or her individual claims. However, such a strategy may have a higher likelihood of success if the employee is subject to mandatory arbitration since the PAGA claims are likely to be stayed while the employee’s individual claims are litigated in the arbitration forum.

Non-Compete Clauses in Action

Previously on our blog, we discussed the enforceability of non-compete clauses. It is important to be familiar with the concept not only for contracting purposes, but also from the standpoint of being either an employer or employee. Recently, this issue has been in California state news, as it appears that large companies are trying to enforce non-compete clauses that are found in employment agreements of low-wage workers.

The case at issue involved Benny Almeida, a former employee of the company ServiceMaster. While at ServiceMaster, Almeida was paid $15-an-hour for his cleaning job. Another company reached out to him and offered to pay him $18 an hour to do cleaning work there. Almeida took the higher paying job, but was then threatened with legal action from ServiceMaster. The reason is because Almeida’s employment agreement with ServiceMaster contained a non-compete provision allegedly prohibiting him from doing similar work in the same geographic area as the ServiceMaster location. ServiceMaster has claimed that the non-compete provision is to prevent ServiceMaster from training employees only to see their efforts benefit competitors.

As we discussed previously, non-compete provisions are heavily disfavored both by the Courts and by the public policy codified in the laws of the California Labor Code.  However, the Code provides one exception to this general rule, allowing non-compete agreements between individuals selling the goodwill of a business, so as to protect a company’s intellectual property, trade secrets, or client lists.

Considering the intent behind the law, it is unlikely that a low-wage worker such as Almeida will be bound to a non-compete agreement with his or her previous employer. But as shown by the Almeida case, there is still uncertainty about the line between illegal and permissible non-compete contract provisions and whether employers can or (economically) should enforce the non-compete provisions in their employment contracts.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

Alternative Dispute Resolution

The legal conflicts that businesses most often face are contract disputes, financial disputes, and employer-employee issues. If your business is facing such a conflict, it will be encouraging for you to know that most of these disputes can and are resolved without going to court. Alternative dispute resolution (“ADR”) can save your business a lot of time and money if you utilize it as a means to resolving your legal issues. There are many kinds of ADR, but the most commonly used are negotiations, mediations, and arbitrations.

In a negotiation, the parties involved in the dispute, or their attorneys, communicate directly with each other to try reaching a mutually agreeable resolution.

In mediation, a neutral third-party (the mediator) serves as a middleman in a confidential process. Each party spends time alone with the mediator engaged in a discussion aimed at finding a way to resolve the conflict. The mediator switches between the parties communicating possible resolutions until an agreement is made. A mediator generally does not have the power to decide the case if an agreement is not reached.

In arbitration, a neutral arbitrator is the one that makes the final decision after reviewing presentations from both sides. The presentations usually include documents and witness testimony related to the dispute. If the arbitration was set up by a court, the arbitrator’s decision may be binding, meaning that the case will not proceed to trial. If the arbitrator’s decision is non-binding, however, the parties will still have the option to take their case to trial.

Alternative Dispute Resolution can be used instead of filing a lawsuit, or if a lawsuit has been filed, it can help avoid trial. Unless mandated by a court, the parties can usually pick which type of alternative dispute resolution to pursue. In addition to resolving a dispute faster than is possible in court, alternative dispute resolution has many other benefits. It is often less costly and time intensive, it is usually confidential, and it can help preserve relationships through better communication.