A California federal court recently called into question the enforceability of employee non-solicitation clauses within the state.
In Barker v. Insight Global, LLC, et al., Case No. 5:16-cv-07186-BLF, the United States District Court for the Northern District of California reconsidered its position regarding the legality of an employee non-solicitation clause in plaintiff’s employment agreement, reversing its decision to dismiss a putative class action claim for failure to state a claim. Plaintiff Jonathan Barker, a former executive at Insight Global, brought this action alleging that the non-solicitation clause found in his contract violated California’s Unfair Competition Law. While Barker worked in the employee recruiting business, none of his job duties as a high-level manager/executive with Insight Global caused him to focus on or have responsibilities for the actual recruiting functions performed by other executives at Insight Global. After initially dismissing these claims in summer 2018, the Court reversed course, upon Barker’s motion to reconsider, finding that non-solicitation clauses are presumptively invalid under §16600 of the Cal. Bus. & Prof. Code, unless they fall within an exception to that section. Barker brought a motion for reconsideration after the California Court of Appeals issued the decision in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (Ct. App. 2018), published on November 1, 2018, holding that the plain meaning of §16600 applied to a non-solicitation clause found in defendant-corporation’s Confidentiality and Non-Disclosure Agreement (“CNDA”) and in turn that the non-solicitation agreement restrained former employees from engaging in their chosen profession in violation of §16600.
But context is sometimes very fundamental to understanding what effect a ruling may have on employers going forward. AMN Healthcare involved two companies who made their business recruiting temporary nursing workers. Several executives of AMN left to join AYA – AMN’s competitor – but were subject to a one-year restraint against directly or indirectly soliciting or inducing, or causing others to solicit or induce any employee of AMN to leave the service of AMN. AMN sued the departing executives who had joined AYA for breach of the non-solicit provision. On summary judgment on defendants’ cross-claim seeking to void the non-solicit agreement under §16600, the trial court agreed with defendants, granting summary judgement and issuing an injunction against further enforcement of the non-solicit provision. In so doing, the AMN court relied on the 2008 decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), which found unenforceable an agreement that purported to restrict a former accountant’s ability to serve clients, but which, arguably, did not address the viability of a non-solicit provision of an employee covenant. What is potentially troubling for employers operating in California is that the Barker court categorically rejected non-solicitation agreements: “the Court is convinced by the reasoning in AMN that California law is properly interpreted post-Edwards to invalidate employee non-solicitation provisions.” The Barker court further rejected the former employer’s argument that AMN should be limited to the particular context of that case – those involving employee recruiting companies – even though the employees at the center of the AMN dispute were recruiting specialists with a focus on healthcare professionals. Moreover, the Barker court so opined even though it provided little reasoning for its conclusion that all non-solicitation provisions of employee agreements are, in that Court’s view, void under §16600.
It remains to be seen whether other courts will choose to adopt Barker’s logic and signal further departure from the longstanding precedent of Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985), which determined the validity of non-solicitation clauses on the familiar reasonableness standard courts around the country have long used to evaluate such provisions.