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.