That California bans non-compete agreements on policy grounds as an unreasonable restraint on employee mobility is well known; what is far less known, however, is that California's courts have now come down on the side of invalidating some non-solicitation provisions as well.

This is a very big deal.

What California's Business and Professions Code Sections 16600, et seq. Say

This famed provision banning non-compete agreements states as follows:

16600:  "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." 

On the other hand, the California legislature saw fit to carve out trade secrets from this ban, which includes, most pertinent to this case, as follows:

16607 (a): A customer list, including the "names, addresses and identity of all employer customers who have listed job orders with an employment agency within a period of 180 days prior to the separation of an employee from the agency . . . shall constitute a trade secret and confidential information of, and shall belong to, the employment agency."

What Happened in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc.

In this case, AMN and Aya were (and are) competitors in placing temporary "travel nurses" to medical care facilities throughout the continental United States. As a condition of their accepting a job with AMN, the individual defendants in this case (some of the travel nurses) each signed an agreement that included a clause barring them from soliciting any AMN employee or patient for one year post-termination.

And, when they joined Aya, a competitor, that's precisely what these travel nurses did.

Predictably, AMN sued; the defendants then moved to dismiss the case, arguing that the non-solicitation provisions were also barred by California law because they constituted an unfair impingement on their ability to work in the field of their choosing.

After the trial court ruled in the defendants' favor, AMN appealed.

In affirming the trial court's judgment, the California Court of Appeal ruled, in pertinent part, as follows:

 [T]he undisputed evidence in the record shows that, if a former AMN recruiter (i.e., individual defendants) was barred for at least one year from "soliciting or recruiting any travel nurse listed in AMN's database, that would [likewise] restrict the number of nurses with whom a recruiter could work with while employed by his or her new staffing agency"; that if a former AMN recruiter was barred from "soliciting or inducing to leave AMN's employment any AMN current travel nurse with whom he or she had worked with as an AMN recruiter, that would [likewise] restrict the number of nurses with whom a recruiter could work with while employed by his or her new staffing agency"; and that "[n]ot being permitted to contact travel nurses who currently work for AMN could limit the amount of compensation a recruiter would receive with his or her new agency after leaving AMN...

"The undisputed evidence thus shows section 3.2 of the CNDA restricted individual defendants' ability to engage in their "profession, trade, or business."

Why the Court Threw Out AMN's Customer Solicitation Claims

At first blush, based on 16607's allowance for agreements preventing former employees from poaching trade secrets, including client lists, it would seem that AMN's claims in this regard should have been allowed to proceed. The California trial and appeals courts didn't see it that way, however, finding that the undisputed facts in this particular case demonstrated that these patient and client lists could not possibly be considered a legitimate "trade secret":

"[E]ven assuming that AMN qualifies as an "employment agency" within the meaning of this statute, AMN has no legal basis for claiming the names and contact information of Morris, Meyer, and Hennis in Aya's database were somehow AMN's trade secret, when the undisputed evidence shows each of these travel nurses already was known to Aya and was in its database, long before each individual defendant left AMN and went to work for Aya."

The Takeaway

It is critical not to read too much into this decision, and to remember that this decision clearly turned on the particular facts of this case, rather than on a broad legal principle. Simply put, employers in California (or those governed by California law) would be well advised to consider whether they have a legitimate trade secret before initiating litigation against departing employees who are soliciting employees or clients, because they risk being hit with the other side's legal fees if they lose - as AMN was in this case.

Jonathan Cooper
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Non-Compete, Trade Secret and School Negligence Lawyer
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