News & Updates

On Edge: Protections Surrounding California’s Employee Non-Solicitation Clauses Continue to Erode December 4, 2018

In a recent decision, the Fourth District Court of Appeal shook the California employment landscape when it ruled that a non-solicitation contractual provision was unenforceable pursuant to California Business and Professions Code Section 16600.

 

Background

This case involved competing staffing agencies that provide temporary basis health care professionals, such as travel nurses, to medical care facilities throughout the country. The individual defendants in this lawsuit were former travel nurse recruiters of a large health care staffing agency who left their former employer to work for a competing health care services company. As a condition of employment with the staffing agency, these recruiters each signed a Confidentiality and Non-Disclosure Agreement (CNDA), which included a provision preventing them from soliciting any of the agency’s employees to leave its service for a period of at least one year following termination of their employment with the agency.

The CNDA Non-Solicitation Provision (Section 3.2) read as follows:

“Employee covenants and agrees that during Employee’s employment with the Company and for a period of [one year or] eighteen months after the termination of the employment relationship with the Company, Employee shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of the Company or any Company Affiliate to leave the service of the Company or such Company Affiliate.”

Beginning June of 2015, several of the agency’s recruiters resigned and accepted a position with the competing health care services company. The agency alleged in their First Amended Complaint (FAC) that the individual defendants — the formerly employed recruiters — accessed its confidential and proprietary documents containing information regarding its individual recruiters placed on assignment throughout the country, which was then emailed to the individual defendants’ personal email addresses. The FAC further alleged that this same individual forwarded to the services company a confidential email sent by a senior manager at the staffing agency that outlined a strategy for “competing with the services company.”

The defense in this case filed a dispositive motion arguing that the CDNA non-solicitation provision was an unenforceable restraint on trade under Section 16600 and therefore void. The trial court granted the motion finding that the non-solicitation provision was in violation of Section 16600 because it prevented former recruiters from engaging in their lawful trade and profession — soliciting and recruiting travel nurses on temporary assignment with the health care staffing agency — for at least one year following termination. The Fourth District Court of Appeal upheld the trial court’s ruling.

 

Decision

Most states, including the Ninth Circuit, apply a “rule of reasonableness” to determine whether a non-solicitation contractual provision is enforceable. In Edwards v. Arthur Andersen LLP, the California Supreme Court abandoned the commonly held rule that a “mere limitation on an employee’s ability to practice his or her vocation would be permissible under Section 16600, as long as it were reasonably based,” and further held “that California courts ‘have been clear in their expression that Section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.

California state courts have followed suit by rejecting this rule of reasonableness, instead relying on California Business and Professions Code Section 16600’s prohibition against contracts restraining a person’s trade or profession unless they fall into one of four statutory exceptions: the sale of good-will or interest in a business, the dissolution of a partnership, or the dissolution or sale of a limited liability company. However, the Edwards court’s ruling specifically applies to non-compete clauses and did not address the recruitment of employees, which this decision now addresses. 

With this decision, the Fourth District Court of Appeal similarly rejected the application of the reasonableness standard with respect to non-solicitation provisions, and focused on the strict language of Business and Professions Code Section 16600 as well as the legislature’s intent in drafting this code section in the restrictive manner in which it is now found. However, in determining that the non-solicitation provision in this case is invalid, the court explained that even if the reasonableness standard was applied to the facts of this case, it would still be found unenforceable.

The court also found that the limited exceptions of Section 16600 did not apply for the following reasons: (1) the agency failed to allege that its trade secrets were used by the recruiters to solicit and hire its travel nurses; (2) identities and contact information of individuals who worked on temporary nursing assignments were not secrets that could be classified as “trade secrets” due to the general nature of the information that was readily obtainable from public forums such as social media outlets; (3) the case did not involve a sale of a business or the dissolution of a partnership or LLC; and (4) the agency’s senior manager’s forwarded email that included a very general bulleted list of information about the services company as well as a list of questions that recruiters should ask current and prospective travel nurses to learn about the services company’s ongoing recruitment efforts is not a protectable trade secret.

It remains unclear whether the staffing agency will appeal to the California Supreme Court to clarify this unresolved area of law. Until it does, employees will rely on this ruling to argue that non-solicitation provisions are unenforceable, while employers will argue that the appellate court’s decision is limited to the facts of that case (e.g., the “non-solicitation” provision in essence was guised as a form of non-compete clause that pertains to the recruitment and employment of traveling part-time nurses) and thus is not analogous to the employer’s specific facts and circumstances.

 

Business Ramifications

Given the unsettled nature of laws related to non-solicitation provisions, employers should review their agreements to determine whether the non-solicitation agreement should be modified or completely removed when viewed in context of their work. Changing the choice of law in these agreements — e.g., to require that the agreement apply out-of-state law as opposed to California law — with respect to controversies arising in California unfortunately is not an option under California Labor Code Section 925 if the employee primarily resides and works in California and executes such an agreement as a condition of employment. Employers should obtain experienced employment counsel in determining whether enforceability of such a non-solicitation provision is a viable option, as these inquiries are routinely fact-based and require a detailed analysis of the applicability of Business and Professions Code Section 16600 and its progeny, including Edwards and the recent Fourth District Court of Appeal decision. Goldberg Segalla’s Employment & Labor Practice Group attorneys are available to effectively and efficiently assist employers in navigating these issues.

 

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