For more than 30 years, employers have relied on the California Court of Appeal’s decision in Loral Corp. v. Moyes to support the inclusion of employee non-solicitation provisions in employment agreements.

However, the same court’s recent decision in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., was a wake-up call to employers that these provisions may no longer be a dependable tool for maintaining a stable workforce.

(NOTE: Constangy is counsel of record for AMN in an unrelated lawsuit.)

In AMN, a case involving recruiters of travel nurses, a trial court invalidated the non-solicitation provision in the recruiters’ employment agreements, finding that it restrained the recruiters from practicing in their business and profession. The state Court of Appeal affirmed the trial court decision in November 2018.

Then, last month, a federal judge in California reversed her prior decision in favor of an employer based on the AMN decision. In Barker v. Insight Global, the plaintiff had sought a declaration from the court that his former employer’s non-solicitation provision was unenforceable under California Business & Professions Code Section 16600. Section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

U.S. District Court Judge Beth Labson Freeman had initially dismissed the plaintiff’s claim related to the non-solicitation provision, following the Loral decision. However, she revisited that after AMN and broadly stated that she was “convinced by the reasoning in AMN that California law is properly interpreted . . . to invalidate employee non-solicitation provisions.” The Barker decision is the first to interpret and apply AMN. According to Judge Freeman, AMN made a “change in law warranting a fresh look and a changed outcome.”

The 1985 Loral decision held that restrictions placed on an executive from soliciting employees, which had only a “slight effect” on the executive and did not hinder him from seeking employment with a competitor, were sufficiently different from a true noncompete agreement and did not violate Section 16600.

But in AMN, the plaintiff and corporate defendant were competitors, both providing temporary healthcare professional staffing to medical care facilities throughout the nation, and in particular the placement of travel nurses at those facilities.

(According to TravelNursing.org, a travel nurse “is a nurse who is hired to work in a specific location for a limited amount of time. Travel nurses typically work 13 week periods in one area, and move around the country depending on where they are needed. Because the demand for nurses is so high, there are often shortages in certain areas, and a traveling nurse will be hired to come in and work in a specific position for a short amount of time.”)

After several recruiters left AMN to work for Aya, AMN sued the recruiters and Aya. The defendants contended that the non-solicitation provisions in their employment agreements with AMN violated Section 16600. The Court of Appeal determined that the recruiters were in the business of creating, cultivating, and maintaining relationships with the traveling nurses to help get the nurses placed at medical facilities. Thus, said the court, the recruiters were in the “profession” of recruiting.

According to the court, enforcing the non-solicitation provision would restrain the recruiters from engaging in their profession by potentially limiting the number of nurses with whom they could work. And, as the recruiters had argued, this in turn could limit their earnings after leaving employment with AMN.

AMN and Barker have stoked the fire on the question of the continued viability of employee non-solicitation clauses in California, and we will continue to report on developments related to this issue.