NON-COMPETETION AND NON-SOLICITATION AGREEMENTS
California has a strong public policy and law that protects California employees from non-compete agreements. Non-solicitation agreements are also illegal, to a certain extent explained below. Our firm has extensive experience in this area of the law; protecting employees against illegal provisions that violate the law and helping employers understand and draft enforceable provisions.
In California, non-competition agreements are governed by Business & Professions Code §16600 which provides, in pertinent part “. . .every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The statute permits non-competition agreements in the context of sale or dissolution of corporations, partnerships and limited liability corporations. Other than these narrow exceptions connected with the sale or dissolution of a company, California will not enforce non-compete agreements because it is against public policy and statute.
The seminal case in California is the 2008 California Supreme Court decision in Edwards v. Arthur Anderson (“Edwards”) where the court ruled that the non-competition agreement at issue was invalid under California law. The agreement prohibited the departing employee from performing professional services for any client he worked with at the firm for an 18-month period of time. It also prohibited the employee from soliciting any client of the firm’s Los Angeles office. The California Supreme Court held that both of these prohibitions restricted the employee’s ability to practice his accounting profession, and were unenforceable under California law.
In the area of Non-Solicitation Agreements (or terms) there are two types: one that restricts the employee’s ability to solicit customers and another that restricts the employee’s ability to solicit employees.
Customer Non-Solicitation Agreements
In the above referenced Edwards case, the California Supreme Court ruled that a prohibition on a former employee’s solicitation of clients or customers was an invalid restraint on the employee’s ability to pursue his trade or business. However, agreements prohibiting the use of trade secrets to solicit customers and clients have been upheld. California makes it unlawful for employees to misappropriate trade secrets from a former employer or to use confidential information or trade secrets to solicit customers or clients of the former employer.
Employee Non-Solicitation Agreements
California law on the enforceability of employee non-solicitation agreements is in flux and not clear as of this writing. You should consult with your attorney for advice.
In Loral v. Moyes, which is a 1985 California appellate court decision, the court held an employee non-solicitation provision did not violate Section 16600 and was enforceable. The court found such prohibition was a reasonable and limited restriction that had little impact on employee mobility and helped promote a stable work force by preventing departing employees from raiding and poaching an employer’s employees. But, there are two more recent California cases that place into doubt the continuing viability of the Loral case and have found such employee non-solicitation provisions unenforceable.
In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. a California appellate court invalidated a post-employee non-solicitation provision on the grounds that it restrained trade in violation of Section 16600 of the Business and Professions Code. The provision in question prevented travel nurse recruiters from soliciting company employees for 12 to 18 months post-employment. The court found that the provision unlawfully restrained the nurse recruiters from engaging in their profession which was soliciting travel nurses within their network regarding new employment opportunities. The appellate court recognized that Loral had permitted such non solicitation provisions, but doubted the continuing validity of Loral in light of the Edwards decision holding that any restrain on a person’s ability to engage in their profession is illegal. Note that only the California Supreme Court can overrule Loral, and it has not done so in Edwards or in any other case
In Barker v. Insight Global, LLC, a 2019 federal district court decision in the Northern District of California, the court held a provision restricting a regional director from soliciting employees or contractors during his employment and one-year post-employment was unenforceable.
Given the above cases, it is important that you consult with your attorney before including a non-solicitation of customers, clients or employees restriction in any employment agreements or documents that you give your employees to sign.