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Another Case Nullifies a Non-Solicitation-of-Employees Agreement

A few months ago, we wrote about the case of AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., Case No. D071924 (Cal. App. 4th Dist. November 1, 2018). See here. In that case, we discussed how the court found an employee non-solicitation agreement unenforceable. Most San Diego employers are familiar with the rule that noncompete agreements are illegal and not enforceable here in the Golden State. This has long been the case and is codified at Cal. Bus. & Prof. Code, § 16600.

However, under prevailing caselaw up until the AMN Healthcare case, it was legal for employers to have employees sign an agreement prohibiting so-called “poaching.” This is where a current employee seeks to take other employees with him or her after separating and going to a new business or starting a competing business. The leading case was Loral v. Moyes, 174 Cal. App. 3d 268 (1985). In Loral, the court upheld a so-called “no-poach” agreement since it did not unduly impinge on the ability of the employee to find a new job or continue in his/her career. In other words, a “no poach” agreement did not interfere with the ability of a worker to pursue his or her trade or profession. That is what is protected by section 16600 of the Business & Professions Code.

The AMN Healthcare case did not overrule or nullify the Loral case, but it did come to a different conclusion. Now, a new decision has recently been released by a federal judge in San Jose following AMN Healthcare and suggesting that Loral is no longer good law in California. See Barker v. Insight Global LLC, Case No. 16-cv-07186-BLF (US Dist. N.D. Cal. January 11, 2019).

In Barker, a former employee sued his former employer for various causes of action including violations of various California labor statutes and Wage Orders. For example, Barker claimed that he had not been paid his unused vacation pay and similar violations. In addition, Barker sought a determination that part of his employment agreement was illegal and unenforceable: that part that prevented him and similarly-situated employees from soliciting customers and/or fellow employees for one year after termination. The specific provision was this (it is a long provision, but it is worth setting it out in full since this is a very common employment contract provision which is now being nullified):

“4. AGREEMENT NOT TO SOLICIT EMPLOYEES. Employee agrees that, during Employee’s employment with Employer and for one (1) year after the termination of such employment (the “Restricted Period”), Employee shall not directly or indirectly, or in concert with others, solicit or encourage any person who is an employee of, or contractor or consultant for, Employer, to resign from or terminate such employment or consulting relationship with Employer. Employee further agrees that Employee shall not, during the Restricted Period, … solicit or encourage any person who is, or within one year prior to the solicitation was, an employee of Employer providing staffing services for Employer, to perform staffing services for any corporation, individual, enterprise, entity or association that competes with Employer in Employer’s Business (a “Competing Staffing Business”).”

In July 2018, the US federal judge had upheld this provision under the rule set forth in the Loral case. Indeed, the court dismissed Barker’s claim with respect to this “no-poach” provision. See July 24, 2018 Order from the Barker Court here. This was “good” for San Diego employers because this was consistent with settled expectations and prevents a free-for-all of employees leaving en mass particularly when a senior level employee is separating.

However, AMN Healthcare was decided November 1, 2018, and the federal court was persuaded that AMN Healthcare required a different result. On January 11, 2019, the court did indeed reverse its earlier decision and hold that the “no-poach” agreement was illegal and unenforceable. The court also invalidated a non-solicitation of customers provision which we will discuss in another article.

Barker and AMN Healthcare are worrisome decisions for California employers. The provisions that have been struck down in both cases are standard, almost “boilerplate” clauses that are inserted into employment contracts here in California. Technically, Loral remains “good law,” but there is now significant uncertainty. Further, given the settled nature of the law with respect to “no-poach” clauses, very few contracts contain “savings” or severability” or “blue-lining” provisions that might allow a court to sustain part but disallows other parts of the provisions. In other words, would a shorter time period such as six months post-separation be lawful? Or would it be enforceable if the no-poach was limited to “while-still-employed?” Businesses have a legitimate stake in preventing departing employees from pirating away members of the staff. It is important to have an experienced San Diego corporate attorney review your employment agreements to add or remove language to help ensure their enforceability.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” four years running by and “Best of the Bar” by the San Diego Business Journal. Contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Mr. Leonard can help with employee-related matters such as employment contracts, drafting and/or reviewing company employee policies and procedures, creating and/or updating employee handbooks, and more.  Like us on Facebook.

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