California courts have long refused to enforce non-competition agreements between companies and their former employees. Typically, these agreements prohibit an ex-employee from working for a competing business, or from soliciting the company’s customers or clients. Even if these agreements are restricted as to time or geographic territory, California courts have ruled they violate our state’s strong public policy, as declared by the Legislature, in favor of free competition and employee mobility.

One exception to this rule has been agreements that prohibit an ex-employee from “raiding” the company’s current employees. A 1985 decision (Loral Corp. v. Moyes) upheld such an agreement between a defense contractor and its former Chief Executive Officer. The court in that case reasoned that the company’s employees were not hampered from seeking new employment, but only lost the option of being contacted first by the ex-CEO.

However, a new case decided last month has cast some doubt on whether these anti-raiding agreements regarding raiding company’s workforce may continue to be enforced in California.. AMN Healthcare sued four of its former employees who were employed as recruiters and their new employer, Aya Healthcare Services. Both AMN and Aya are competitors in the business of providing healthcare professionals to medical care facilities on a temporary basis.

AMN sought to enforce agreements which prohibited its four ex-employees from soliciting any current AMN employee to work for a competing business for a period of one year after the ex-employee left AMN. However, the California Court of Appeal ruled these agreements were unlawful, and upheld a lower court judgment in favor of the ex-employees and Aya.

The appellate court in AMN noted that under section 16600 of California’s Business & Professions Code, virtually “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” There are three narrow exceptions to this rule: a restraint may be lawful if it is part of a contract for sale of a business interest or goodwill, dissolution of a partnership, or dissolution or sale of a limited liability company.  Other than that, a new case decided recently has cast some doubt on whether these anti-raiding agreements regarding raiding company’s workforce may continue to be enforced in California.

The court ruled that AMN’s contract prohibiting solicitation of its current employees is void under section 16600. Aya hired the ex-employees for the same job they held with AMN – to recruit so-called “travel nurses” to work on temporary assignments with medical facilities who are the employer’s clients.

The court found the anti-raiding agreement restrained the ex-employees from working in their chosen profession (recruiting) for their new employer. If the agreement were enforced, the ex-employees would have been restricted in the number of nurses they could have recruited, and limited in the compensation they could have received after leaving AMN.

The court also pointed out that “travel nurses” typically were assigned to AMN for only 13 weeks at a time. This meant that the ex-employees would have been restrained from recruiting a travel nurse for a period of four assignments over the course of one year.

The court in AMN expressed its doubt as to whether the 1985 Loral decision regarding raiding employees is still good law in California. However, the court also pointed to a major factual difference between the two cases. The ex-employee in Loral was the former CEO, but the ex-employees in AMN “were in the business of recruiting and placing on a temporary basis medical professionals, primarily nurses, in medical facilities throughout the country.”

In addition, the court rejected AMN’s claim for misappropriation of trade secrets. According to the court, undisputed facts showed that the identities and contact information for the “travel nurses” were not a “secret” at all, but were already known to Aya even before it hired any of AMN’s ex-employees. The court also upheld an injunction that prohibits AMN from trying to enforce its anti-raiding agreement against the ex-employees in this case “and others similarly situated.”

Lastly, the court upheld an order requiring AMN to pay about $169,000 in attorney fees to its ex-employees and Aya. This award was made under California’s “private attorney general” statute, which allows a successful party to recover fees in certain cases that result in enforcing “an important right affecting the public interest” and that confer “a significant benefit on the public or a large class of persons.”

What This Means For You

The AMN decision should serve as a cautionary tale for employers in California who already have contracts that would prevent ex-employees from raiding employees from the company’s current workforce, or who are considering drafting or rewriting such agreements. As it now stands, companies will be unable to enforce anti-raiding contracts in California, at least against ex-employees whose primary job duties includes recruiting.

AMN also opens up the broader possibility that anti-raiding contracts will be declared void and unenforceable against California employees in general, regardless of their specific profession – and that the Loral decision from 1985 is no longer good law on this point. The California Supreme Court may be called upon to decide how far-reaching the AMN decision really is.

If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700, or visit us online at www.brgslaw.com.