California Court of Appeal Finds Employee Non-Solicitation Agreement Unenforceable

Previously, agreements prohibiting former employees from soliciting a former employer’s employees were generally considered enforceable, so long as they had reasonable terms. Earlier this month, however, the California Court of Appeal issued a decision, AMN Healthcare v. Aya Healthcare Services Inc., calling into question the validity of any employee non-solicitation agreement.

The Court in AMN Healthcare found that the employee non-solicitation agreement was an unlawful restraint on trade under California Business and Professions Code Section 16600. In that case, AMN Healthcare, a provider of temporary healthcare professionals, sued four former employees – recruiters – who left AMN to work for Aya Healthcare. AMN Healthcare sought to enforce the non-solicitation provisions against the former employees and prevent them from recruiting any temporary nurses with whom they worked while at AMN Healthcare. The Court found that this non-solicitation clause restrained the recruiters from practicing their chosen profession – recruiting temporary nurses – and was, therefore, unenforceable.

While the non-solicitation agreement in AMN Healthcare is distinguishable from many employee non-solicitation agreements, in that the recruiters are in the business of recruiting temporary nurses (i.e. AMN Healthcare’s employees), this decision also called into question the validity of all employee non-solicitation agreements by questioning the validity of prior California precedent, Loral Corp v. Moyes, which held that employee non-solicitation agreements were enforceable, so long as they were reasonable. The court in AMN Healthcare expressed doubt about the continuing viability of this opinion after a subsequent opinion, Edwards v. Arthur Andersen LLP, which held that Section 16600 invalidates any restraint on trade, even reasonable ones. Hence, the court indicated that any non-solicitation agreement is a restraint on trade and therefore unenforceable under Section 16600.

Going forward, employee non-solicitation agreements in California are likely to face increased challenges and may ultimately be found unenforceable.

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