What is encompassed by a non-solicitation agreement
Employers often use the term non-solicitation agreements to describe their rights and obligations with respect to former employees. In a narrow sense, a non-solicitation agreement is an agreement between an employer and its employee which limits the employee’s ability to "solicit" or otherwise pursue business from the employer’s clients or former clients after the employment relationship has ended. The agreement, in effect, gives the employer a "head start" in the competition for its former clients – or, more likely, prospects identified by the former employee.
More generally, non-solicitation agreements may be defined as those that restrict a former employee for a specific period of time from contacting, soliciting, or pursuing business from the employer’s customers and/or employees. The agreement may also be referred to as a non-compete or non-competition agreement. Often , an employee’s obligations under a non-solicitation agreement include a prohibition against contacting the employer’s current and former clients, prospective clients, and/or customers, as well as a prohibition against hiring the employer’s employees after the employment relationship has ended.
Because courts do not enforce non-compete agreements in California, they should not be confused with non-solicitation agreements. Non-solicitation agreements are enforced to the extent that they realistically outline the rights and obligations of a former employee with respect to the employer’s clients and/or employees. Assuming the covenants in a non-solicitation agreement are reasonable, the agreements are most important when the business relies on relationships developed with customers and employees.
California law governing non-solicitation agreements
As a general rule, California courts will not enforce a non-solicitation agreement if it is deemed to be a restraint on trade or business competition. Under California law, Business and Professions Code Section 16600 states: 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, except that an otherwise lawful contract not to compete among the parties to a partnership or limited liability company agreement is valid; and except that the agreements specified in Section 16601, 16602, or 16602.5, and the provisions of Chapter 2 (commencing with Section 166800) of Part 3 of Division 3 of Title 1 of the Corporations Code, are valid and enforceable in this state. In the past, California courts refused to enforce non-solicitation agreements between employees, as well as customer and client non-solicitation agreements because they were considered restraints on the ability to conduct business, and therefore invalid under Business and Professions Code Section 16600. However, in 2015 the California Court of Appeal held that non-solicitation clauses that are not legally considered contracts in restraints of trade or business competition-so-called "narrow restraints" will be enforceable. Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008). In 2017, the California Court of Appeal for the Second Appellate District further clarified that while non-solicitation agreements are disfavored by California Courts, they can be enforceable, under certain circumstances and if the scope of the restraint is narrow. AMN Healthcare, Inc. v. Aya Healthcare Services. The AMN court found a non-solicitation agreement enforceable because the employee was in a specialized field, the time restriction was one year, the geographical scope was nationwide and the employee had some interest in building and preserving the clientele as his work was billed on commissions.
Non-solicitation versus non-compete agreements
When discussing non-solicitation agreements, it is important to remember that these differ from non-compete agreements in terms of the breadth of behavior they seek to restrict. California law is clear that a non-compete agreement is unenforceable under California (and Nevada) law. These agreements are signed on as contracts between employer and employee that essentially state that the employee cannot leave the job under any circumstances and begin working for a competitor.
The difference with a non-solicitation agreement is that such an agreement does not seek to completely restrict the former employee from working altogether. Instead, the agreement only restricts the former employee from soliciting the former employer’s clients or employees. Although the issue remains a factual question, courts generally hold the context of non-solicitation agreements to be restrictions of trade that are enforceable under California law. For example, no California attorney will be asked to sign an agreement that prohibits them from ever representing a client outside of his or her current firm as that would be a non-compete agreement and completely restrictive. However, an attorney can be asked not to solicit a client immediately after leaving a firm because the client represents a financial investment for the firm. Such a non-solicitation is frequently seen as a legitimate and protectable interest by the firm in preventing competitive actions.
What California courts have said
Historically, the California Supreme Court has struck down non-compete agreements where the employee was permanently deprived of the opportunity to work for one’s former employer or a competitor. (See Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.) However, California has held that as long as an employee does not lose the opportunity to work for his/her former employer, such non-compete agreements may be enforceable. (See AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923.) The vast majority of California courts have held that non-solicitation agreements do not have the same legal effect as a non-competition agreement because such agreements do not actually prevent an employee from working for a competitor, they merely limit the competition that an employee may engage in with respect to customers established during his/her time of employment.
In Loral Corp. v. Moyes (1990) 174 Cal.App.3d Sup. 265, the California Court of Appeal found that a former employee of Loral communicated with two employees at Hughes Aircraft Company, suggesting that they join him at Loral. Loral sent a cease and desist letter ordering the former employee to stop his recruiting activity under the terms of the non-solicitation agreement. The court in Loral ruled that the former employee’s behavior was unlawful.
In AMN Healthcare, Inc., v. Aya Healthcare Services, Inc., and Wylie Liu (2018), two former employees signed an employment agreement with AMN Healthcare and were subject to a non-solicitation agreement that prohibited them from soliciting AMN clients for nine months after they left AMN Healthcare. Liu admitted to working with a competitor to try and move several AMN clients to Aya Healthcare. The Court of Appeal affirmed a decision granting injunctive relief to AMN Healthcare, finding that the non-solicitation agreement was lawful.
At least five federal district courts in California have considered whether classic non-solicitation clauses violated California law. Four of these courts determined that the non-solicitation agreement violated Business and Professions Code section 16600. (See Metro-Goldwyn-Mayer v. Lebanon County Employees’ Retirement Fund (9th Cir. 2016) 150 F. Supp.3d 50, 63-64; Superior Consulting Serv. v. Schmidt (Cal. Southern Dist., May 16, 2016, No. 14-CV-540-BAS (DHB)) 2016 U.S. Dist. LEXIS 91094, at *27; Aon Risk Ins. Services v. Roes (S.D.Cal., Sept. 29, 2016) 2016 U.S. Dist. LEXIS 137425, at *38-39; Convolve, Inc.s v. Don Wood (S.D. Cal. 2016) 2016 U.S. Dist. LEXIS 140984, at *19.)
One court, however, ruled that a post-employment non-solicit agreement did not violate both Business and Professions Code section 16600 and California’s public policy under Edwards v. Arthur Anderson. (See Morgan Stanley & Co. v. Skow (N.D.Cal., February 23, 2018) 2018 U.S. Dist. LEXIS 28826, at *69-70.) The Skow court distinguished AMN Healthcare and Aon Risk on the ground that they both involved agreements without a clause stating the extent to which the agreement was intended to be in partial restraint of trade.
Limitations and exceptions to the enforceability issue
Restrictions Against Solicitation of Continuing Employment / Customer Non-Solicitation Agreements
The California Legislature has broadly condemned noncompete agreements. And, as explained in a prior post, a contract to not compete without consideration is void as a matter of California state law (except as it relates to the sale of a business). Yet, in practice, non-solicitation agreements restricting the solicitation of employees and former employees of an employer are regularly enforced by California courts. Additionally, under certain circumstances, an agreement to not "solicit" customers will be enforced. This Post addresses restrictions against "soliciting" employees from former employers. Future posts will address restrictions against soliciting customers.
Challenging the Advanced Bionics Non-Solicitation Agreement
For an example of how a Court may enforce language restricting one "from soliciting" employees from his / her former employer, consider the recent case of Advanced Bionics Corp. v. Medtronic, Inc., 2010 WL 3789084 (Cal. App. Sept. 30, 2010). In Advanced Bionics, a Medtronic sales representative left to join a competitor. His Advanced Bionics employment agreement prohibited him from "directly or indirectly recruit[ing], solicit[ing], or induce[ing] any employee or consultant to terminate his/her relationship with the Company."
In Advanced Bionics, a Court of Appeal rejected a trial court’s finding that the AB non-solicitation clause as written violated California Business and Professions Code Section 16600. The Court of Appeal explained that "AB was seeking to protect its investment in its employees by preventing Medtronic from raiding its workforce and soliciting away AB employees." (Emphasis added). The Court reasoned that the AB non-solicitation clause was similar to non-solicitation provisions enforced in existing cases because those clauses "sought to bar defendants from poaching plaintiffs’ valuable employees." Id. at *5.
Some Restrictions Against Solicitation of Employment Agreements May Be Deemed Invalid
Even though in Advanced Bionics the Appellate Division expressly rejected the idea that a broad agreement restricting an employee from "induc[ing]" an employee of a former employer is unenforceable as against public policy under California law , courts have found non-solicitation agreements to be invalid where the circumstances of the case are of a different nature. For example, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018), the California Court of Appeal held that the non-solicitation clause at issue was void because the purpose of the clause was to prohibit a former employee from "trading" learned skills or knowledge for employment with a competitor. The Court explained that general skills and knowledge "are not protectable interests to warrant enforcement of a restrictive covenant." Id. at 931-32 (quoting Atkinson v. Elk Corp. of Texas, 142 F.3d 811, 814 (5th Cir. 1998)). But, the AMN Healthcare did not decide whether agreements restricting agreements from soliciting co-workers or similarly situated employees of a former employer were enforceable in California. Id. at fn. 12.
However, the AMN Healthcare Court did conclude that there were two other reasons that warranted the questioning the validity of the agreement in question. First, no rationale for the restrictions against solicitation were provided, casting doubt on its reasonableness. Id. at 932. Second, AMN Healthcare, Inc. may have received specified consideration for the non-solicitation clause in exchange for the employee’s promise to comply, which would have made the restriction against solicitation enforceable under the California Labor Code. Id. at 935. The industry-wide ban on soliciting former employees may have had the effect of restraining trade. Id. at 939.
Finally, while the California legislature generally prohibits non-compete agreements, copyright laws do provide an exception to that rule. See Cal. Lab. Code ยง 925, in which the California legislature authorizes certain non-compete agreements entered into by an executive officer, or other key employees, so long a post termination non compete is otherwise lawful and that it is provided prior to, or contemporaneously with, the commencement of employment.
Recent developments and trends
Over the past year, California courts have continued to grapple with non-solicitation agreements as employers seek to restrain former employees from soliciting former customers. In Central Valley General Hospital v. Smith (2013) 216 Cal.App.4th 414, the California Fifth District Court of Appeal affirmed a lower court’s order granting a preliminary injunction to an employer enforcing a non-solicitation agreement where the employee had signed a new employment agreement 7 months after the non-solicitation was executed and after inquiries from his employer about negotiating an extension. The employer had provided more compensation to the employee than had been required under the first agreement and the court concluded that the employer’s treatment of the employee negated any argument that the employee was coerced into signing the second agreement. The case confirms that an employer seeking to enforce a non-solicitation agreement must exceed its obligations under an original agreement in order for continued employment to be deemed consideration sufficient to support a new agreement.
In Painted Table, Inc. v. Konop (2013) 215 Cal.App.4th 1621, the California Second District Court of Appeal held that a provision in an employment contract prohibiting the employee for two years from "soliciting for thirty days" any of the company’s employees or customers is a reasonable restraint on competition. Painted Table’s non-solicitation provision was not a "clause" but rather an "addendum" to its contract with the employee and the court declined to address whether this distinction impacted the reasonableness of the restraint. This ruling provides an important point for employers drafting non-solicitation clauses with potential whistleblowers: while courts do not appear to have given undue weight to issues of form over substance, by expressly identifying a clause as an "addendum" to a contract rather than an independent provision, it may help to withstand heightened due diligence if and when challenged.
On May 13, 2014, the Ninth Circuit Court of Appeals held for the second time that an arbitration agreement did not cover contention that a non-solicitation was in violation of the California Labor Code ("Labor Code") and therefore not enforceable under California law. In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (9th Cir. May 13, 2014), the Ninth Circuit held that dispute resolution provisions did not cover a claim that a non-solicitation agreement violated California Labor Code Section 2855, which governs the enforceability of non-solicitation agreements. The Ninth Circuit previously ruled on this issue in AMN Healthcare, Inc. v. Kessler (9th Cir. 2012) 828 F.Supp.2d 1060, which was vacated by the California Supreme Court. The outcome of the Kessler case was pending before the Ninth Circuit while the Ninth Circuit issued the Aya decision, so the Ninth Circuit has not yet issued a final ruling in Kessler despite the parties’ briefing of supplemental authority citing Aya. It remains to be seen how the Ninth Circuit would address this issue again, but regardless of the outcome AMN Healthcare and Aya Healthcare suggest that there may be strategies available to circumvent the broad arbitration agreements that some employers may seek to impose on their employees.
Practical considerations for employers and employees
The California Court of Appeal has provided clear guidance for parties dealing with restricting post-employment non-solicitation agreements. Employers that have previously relied on common law or A&M assigning or delegating duties, or keeping customers uninformed about a change in managers, are now limited in continuing such practices without an express written agreement. There is no moratorium on existing agreements without the requisite elements of an enforceable non-solicitation agreement, and it is likely that judges will now be reluctant to "fix" agreements that lack those elements. However, an employer can still protect its goodwill through an enforceable contract that explicitly maintains its economic interest over the parties’ relationship. For example, an employer can (and should) ensure that it has a signed contract containing the requisite elements of an enforceable non-solicitation agreement before an employee begins soliciting customers. Some employers may feel uncomfortable with employee-friendly contracts that automatically terminate the restrictive covenant after a set period, and instead prefer a contract that voids the restrictive covenant if the employee is not working thirty days prior to termination. However, the Court made clear in AMN that if a restrictive covenant does not last longer than necessary, the contract is voided in its entirety, making it critical that an employer carefully draft contracts with these elements in mind.
It is important to note, however, that an employer presumably does not need a valid non-solicitation agreement if it can prove that offers to solicit individual customers were not made to all customers of the business, but coincided with agreed upon withdrawal periods of the relationship (regardless of the employee’s activities). An employer can preserve this right by prudently enforcing its contractual rights against those who depart from their own obligations to solicit customers, or by taking the opportunity to close conduct perceived as undesirable following the termination of an employee’s employment.
For employees, the best offense is a good defense. That is, employees are empowered to challenge the enforceability of an employer’s non-solicitation provisions through a declaration of an existing non-solicitation agreement. A simple notice to the employer prior to or after its attempts to enforce a post-employment non-solicitation agreement allows a party to explain to a judge why the employer’s agreement is void, and provides a sufficient legal basis for an injunction against enforcement as discussed above.
While some employers may see the Court and CMG’s approach towards the enforceability of non-solicitation agreements as expansive, the only winners in this situation are lawyers who will earn their fees defending against or challenging their application. The real losers will be those employers who fail to protect their interests before the end of their business relationship with salespersons or account managers. Unreasonably lengthy or broader restrictions cannot be cured retroactively, however, if contract provisions containing these elements of enforceability are carefully prepared at the outset, then new issues are avoided and both parties will appreciate the protection that the contract provides.
Conclusion: where is non-solicitation headed
In the meantime, this debate over the viability of non-solicitation provisions will continue to progress in California on a case-by-case basis. In addition, changes to the nature of business in California, including the rise of the gig economy and an abundance of contract workers , may impact how courts view traditional covenants not to compete and non-solicitation agreements. While the ongoing legal battles in California will likely have a significant impact on the future of these agreements, employers should keep in mind that, for the time being, the law governing non-solicitation agreements is unsettled. Employers are accordingly advised to seek guidance from legal counsel when drafting and enforcing non-solicitation agreements.