New Court of Appeals Decision Calls Non-Solicitation Provisions Into Doubt

Earlier this month the Fourth District Court of Appeals issued a decision in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc.  The suit involves two companies that provide travel nurses for short-term employment.  After several AMN recruiters left to work for its competitor Aya, AMN sued arguing the recruiters had violated an anti-raiding provision in their employment contracts when they solicited travel nurses that were employed by AMN.

The Court of Appeals found that the anti-raiding provision, which prohibited former employees from “directly or indirectly” soliciting or inducing any AMN employee to leave AMN for a one year period was void.  The Court of Appeals also rejected arguments that information about the names, contact information and compensation packages of the recruited employees were trade secrets, finding that the information was neither secret, nor of economic value, noting that names and contact information were readily ascertainable through public sources, including notably a social media group for travel nurses.  Similarly, information about pay and benefits offered by competing staffing services was routinely shared between travel nurses and during travel nurses’ employment negotiations with different staffing services.

The long-standing rule in California is that non-compete provisions that prevent a former employee from working for a competitor, or no-hire provisions, that prevent a competitor from hiring a competitor’s employees are void restraints of trade under Business & Professions Code section 16600.  However, historically, California courts have allowed anti-raiding provisions that merely prohibit a former employee from recruiting former co-workers, provided those provisions would not unreasonably restrain an individual from engaging in an otherwise legal profession, trade, or business.

Reasoning that since AMN’s former employees were travel nurse recruiters, and the non-solicitation clause effectively prohibited them from engaging in this profession for a full year, the Court of Appeals in AMN Healthcare concluded that the non-solicitation clause was not reasonable.  The Court of Appeals could have reasonably stopped at this point.  However, it instead went on to comment that in its opinion the California Supreme Court’s 2008 decision in Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, (a non-competition clause case, not non-solicitation case) was incompatible with the application of a reasonableness standard to anti-raiding provisions.

AMN Healthcare is arguably limited to its distinct factual situation—i.e., persons whose business is recruiting cannot be prohibited from pursuing recruiting careers.  However, the Court of Appeals’ strict interpretation of section 16600 and the California Supreme Court’s decision in Edwards calls into question the viability of non-solicitation provisions across the board.   It remains to be seen which reading of AMN Healthcare will be most persuasive to lower courts.  In the meantime, although employers should not throw out non-solicitation clauses, they should certainly be carefully reviewed to ensure that they are appropriately limited in scope and duration.