Several recent court decisions have changed the landscape of California’s competition law, concluding that employee non-solicitation provisions are per se invalid. These cases have major implications both for mature companies relying on such provisions to preserve their talent pool, and for startups and other companies looking to attract the best people from their competitors.
California law is well-known for favoring open business competition. A fundamental part of this policy is that, unlike the overwhelming majority of other states, California generally does not allow companies to contractually prevent their employees from leaving to join or start a competing business. Unrestrained by “non-compete” provisions, employees can freely move among competitors, which helps facilitate the formation of disruptive new businesses and fuels the dynamic Silicon Valley economy.
But, while classic non-competes are invalid, companies have long been able to rely on certain other contractual provisions that do not flatly prohibit an employee from working for a competitor. One such provision is an employee non-solicitation clause, which, rather than barring an employee from working for a competitor like a non-compete, prohibits a departing employee from trying to recruit other, current company employees to join the departing employee at his or her new company. California businesses — large and small, early and late-stage — have routinely included such provisions in their employment contracts.
For some time the enforceability of these “employee non-solicit” provisions has been unclear and largely dependent on the facts of individual cases, but several recent decisions have treated employee non-solicit provisions like non-competes and concluded that non-solicits are invalid under California law. These decisions pave the way for new startups to more readily attract talent and increases the potential liability for companies that rely on non-solicit provisions.
In other words, the courts might have declared that it is open season for companies to poach another business’s talent pool.
Here’s a closer look at each case, followed by our analysis of the implications.
Section 16600: The California Law Protecting Unrestrained Employee Mobility.
California’s policy favoring unrestrained employee mobility is codified in section 16600 of the Business and Professions Code. That section 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.” Courts have long recognized that section 16600 (with limited statutory exceptions) renders invalid contractual non-compete provisions that are designed to prevent an employee from going to work for a competitor. But section 16600 sweeps more broadly still, invalidating contracts that preclude individuals from soliciting their former company’s customers, vendors, and other similar business contacts — although, as discussed below, such solicitation can give rise to tort liability in some circumstances.
Employee non-solicits sit on the outer edge of section 16600’s ambit. Unlike a traditional non-compete agreement, an employee non-solicit does not directly preclude an employee from moving from one company to another. An employee can still reach out to whomever they wish to discuss new opportunities, and an employee can ultimately leave for any new job should they choose. Employee non-solicit provisions simply limit the universe of third parties (those subject to the restriction) who can reach out to the employee to recruit or encourage him or her to leave their current company for a new job. In other words, employee non-solicits present an indirect and somewhat limited restraint on an employee’s ability to engage in his or her profession. For this reason, courts have grappled with whether, and to what extent, employee non-solicits should be permitted under section 16600.
Foundational Cases: Loral Corp. v. Moyes and Edwards v. Arthur Andersen LLP.
Since 1985, the guidepost for the enforceability of employee non-solicits was the decision by the California Court of Appeal in Loral Corp. v. Moyes, 174 Cal. App. 3d 268, 276 (1985). In that case, Moyes, a former employee, entered a termination agreement that precluded him from “raiding” his former company’s employees, i.e., soliciting them to join him at his new venture. Moyes argued such a provision was invalid under section 16600, but, relying on the long-standing common-law “rule of reasonableness,” the Court of Appeal concluded that the restriction was enforceable. The Court reasoned that the non-solicit in Moyes’s termination agreement “only slightly” affected employees’ mobility because they were “not hampered from seeking employment” with Moyes’s new company, and “[a]ll they lose is the option of being contacted by [Moyes] first.” Loral, at 280. Following Loral, courts generally applied the rule of reasonableness and upheld provisions prohibiting active solicitation of a company’s employees.
The viability of Loral became questionable following the California Supreme Court’s decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008). In Edwards, the Supreme Court rejected the “rule of reasonableness” in the context of non-competes, citing California’s policy of open competition and unfettered employment mobility. Accordingly, any restraint on employee movement was found impermissible under section 16600. However, Edwards explicitly did not address the viability of employee non-solicits and refrained from overruling Loral. In fact, the Supreme Court noted in Edwards that the former employee did not dispute the enforceability of the non-solicit provision in his contract with Arthur Andersen. Edwards, at 946 n.4. As a result, Loral remained binding law, and narrowly tailored employee non-solicits remained largely enforceable even following the Edwards decision.
Courts Have Recently Concluded That Employee Non-Solicit Provisions, Like Non-Competes, Are Per Se Invalid.
In several recent decisions, courts have decided that Loral no longer remains binding law and have concluded that employee non-solicits are per se invalid under section 16600. In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018), the California Court of Appeal addressed the enforceability of an employee non-solicit and noted that the Loral court had used the “reasonableness” standard that Edwards had rejected. Because of this, the court “doubt[ed] the continuing viability of [Loral] post-Edwards,” thereby strongly suggesting non-solicits were unenforceable in California.
Then, relying on AMN Healthcare, Inc. and Edwards, two federal district courts recently concluded that employee non-solicits are per se invalid under section 16600. In Barker v. Insight Glob., LLC, No. 16-CV-07186-BLF, 2019 WL 176260, at *3 (N.D. Cal. Jan. 11, 2019), an individual claimed that his former company’s inclusion of an employee non-solicit in his employment contract amounted to unfair competition in violation of Business & Professions Code section 17200. Relying on AMN Healthcare Inc., the court agreed with the former employee, concluding that the employee non-solicit was invalid under section 16600 and further deciding that the company’s inclusion of the non-solicit in the employment contract amounted to unfair competition. Another case, WERIDE CORP., v. KUN HUANG, et al., No. 5:18-CV-07233-EJD, 2019 WL 1439394, at *10 (N.D. Cal. Apr. 1, 2019), presented the court with another common scenario: a business sought a temporary restraining order (also known as a “TRO”) to stop a departing employee from soliciting its current employees. Citing AMN Healthcare Inc. and Barker, the court rejected the company’s claim and explained that employee non-solicit provisions are “void under California law.”
If the reasoning in these decisions gains traction, it presents several challenges — and opportunities — for companies and their employees.
The Implications Of These Decisions for California Businesses And Employees.
These recent cases have several different implications which can be viewed as positive or negative depending on one’s position in the Silicon Valley economy.
First, these developments will likely lead to more competition by allowing a startup to attract top talent from a founder’s prior company. Just as the unenforceability of classic non-competes facilitated dynamism and positive disruption across the tech industry, so too should the invalidity of employee non-solicits, albeit on a smaller scale.
Second, on the flip side, one purpose employee non-solicits served was allowing companies to maintain a stable work force without constant fear of former employees with inside knowledge “raiding” the company talent pool. Every company will now need to be (even more) hyper-vigilant when an employee departs to join, or start, a competing venture because the rest of the company’s work force may follow.
Third, companies that continue to maintain employee non-solicits in their employment contracts and related documents risk liability under at least two separate theories: (1) including a contractual provision that violates section 16600 amounts to unfair competition under California’s Business & Professions Code; and (2) requiring an employee to agree to a non-solicit provision as a condition of continuing employment can expose a company to liability for wrongful termination. In other words, assuming the AMN Healthcare, Barker, and WERIDE CORP decisions remain good law, even including an employee non-solicit in an employment agreement could expose a company to liability.
Fourth, if companies are no longer able to rely on employee non-solicits, they are likely to search for other ways to prevent and restrict talent poaching. For example, partly because non-compete provisions are unenforceable in California, companies are much more aggressive in pursuing claims for breach of confidentiality and trade secret misappropriation. Companies will probably assert these and similar claims when a former employee begins soliciting a company’s current employees. For example, these companies will have more incentive to claim that departing employees stole proprietary information or engaged in other actions giving rise to liability. One tort in particular that companies might start alleging more frequently against former employees soliciting their talent is tortious interference with prospective economic advantage. Courts have concluded that someone who poaches talent can be liable under this tort if he or she disrupts a current employment relationship and commits a separate wrong in the process (e.g., misappropriation, fraud, violations of the Computer Fraud and Abuse Act, etc.). Without an employee non-solicit provision to rely on, there could be an increase in these types of claims as a substitute.
In the end, companies of all stages and sizes, and employees planning on departing to join or start a competing venture, should closely monitor these recent developments with their lawyers to determine whether the AMN Healthcare, Barker, and WERIDE CORP decisions are a string of outliers or the beginning of a new landscape for competition law.