In its 2008 landmark decision Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, the California Supreme Court set forth a broad prohibition against non-compete provisions, but it left open whether or to what extent employee non-solicit provisions were enforceable. Since Edwards, no California appellate court has addressed that issue in a published opinion – until recently. On November 1, the California Court of Appeal in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., ruled that a broadly worded contractual clause that prohibited solicitation of employees for one year after employment was void under California Business and Professions Code section 16600, which provides “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.” The decision calls into question the continuing viability of employee non-solicitation provisions in the employment context, and employers who regularly include such provisions in their agreements should reassess their use and enforcement of those provisions.

AMN and Aya are competing healthcare staffing companies that provide travel nurses, to medical care facilities throughout the country. The individual defendants were former travel nurse recruiters of AMN who left AMN and joined Aya, where they also worked as travel nurse recruiters.

The individual defendants each signed a confidentiality and nondisclosure agreement (CNDA) with AMN, which included a provision preventing them from soliciting any employee of AMN to leave AMN for a one-year period. Section 3.2 of the CDNA provided:

Employee covenants and agrees that during Employee’s employment with the Company and for a period of [one year or] eighteen months after the termination of the employment relationship with the Company, Employee shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of the Company or any Company Affiliate to leave the service of the Company or such Company Affiliate.

Because AMN’s travel nurses were employees of AMN, section 3.2 of the CNDA applied to prevent a former AMN employee from recruiting a travel nurse on a temporary assignment for AMN.

After the individual defendants resigned, AMN sued them, asserting various causes of action, including breach of the non-solicitation provision in the CNDA. Defendants filed a cross-complaint, requesting the court declare the non-solicitation provision in the CNDA void and enjoining AMN from enforcing the provision against other former AMN employees.

The defendants moved for summary judgment of AMN’s complaint and of their own cross-complaint. Defendants claimed that the non-solicitation provision in the CNDA was an improper restraint on individual defendants’ ability to engage in their profession – soliciting and recruiting travel nurses – in violation of Business and Professions Code section 16600. The trial court agreed, and granted defendants summary judgment on AMN’s complaint and granted summary adjudication of defendants’ declaratory relief cause of action. Then the court enjoined AMN from enforcing the employee non-solicitation provision in the CNDA as to any former California employee and awarded defendants attorney’s fees.

The Fourth District Court of Appeal affirmed the trial court’s grant of summary judgment. In doing so, the court concluded that the non-solicitation provision in the CNDA was void under section 16600. “Indeed, the broadly worded provision prevents individual defendants, for a period of at least one year after termination of employment with AMN, from either ‘directly or indirectly’ soliciting or recruiting, or causing others to solicit or induce, any employee of AMN. This provision clearly restrained individual defendants from practicing with Aya their chosen profession—recruiting travel nurses on 13-week assignments with AMN.” The court further found that a one-year, post-termination restriction preventing a former AMN recruiter from contacting and recruiting a travel nurse on a 13-week assignment with AMN “at a minimum equates to a period of four such assignments for a given nurse. The undisputed evidence thus shows section 3.2 of the CNDA restricted individual defendants’ ability to engage in their ‘profession, trade, or business.'”

In granting summary adjudication, the court rejected AMN’s reliance on Loral Corp. v. Moyes (1985) 174 Cal. App. 3d 268 for the argument that the CNDA was valid because it only prevented non-solicitation of employees (here, travel nurses). Moyes involved the validity of a contractual clause restricting a former executive officer from “raiding” the plaintiffs’ employees. In determining the provision was more like a permissible non-solicitation or nondisclosure agreement and not an invalid non-competition agreement, the court observed that the agreement “restrained [defendant] from disrupting, damaging, impairing or interfering with his former employer by raiding [the plaintiffs’] employees …. This does not appear to be any more of a significant restraint on his engaging in his profession, trade or business than a restraint on solicitation of customers or on disclosure of confidential information.”

 The court concluded that Moyes‘s use of a reasonableness standard in analyzing the non-solicitation clause conflicted with Edwards – decided over twenty years later – where the California Supreme Court interpreted Section 16600 to be a “settled public policy in favor of open competition,” and rejected the common law “rule of reasonableness.” Because the Edwards court found section 16600 “unambiguous,” and noted that “if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect,” the court expressed “doubt [as to] the continuing viability of Moyes post-Edwards.”

The court also affirmed the injunction, which prevented AMN and its employees and agents “from using, enforcing, or attempting to enforce any contract or employment agreement in the State of California which purports to restrain its former employees from directly or indirectly soliciting or inducing, or causing others to solicit or induce, any employee of AMN to leave the service of AMN.” In connection with the injunction, the court approved an award of attorney’s fees to defendants under Code of Civil Procedure section 1021.5, which permits fees to be awarded “in any action which has resulted in the enforcement of an important right affecting the public interest if: (a) a significant benefit … has been conferred on the general public or a large class of persons, (b) the necessity and financial burden of private enforcement … are such as to make the award appropriate, and (c) such fees should not in the interest of justice be paid out of the recovery, if any.”

In affirming the award of attorney’s fees, the court concluded that “Defendants clearly were successful parties within the meaning of the statute … the instant action involved an important issue affecting the public interest, namely the enforceability of section 3.2 [of the CNDA, which], if enforced, prevented former AMN employees from recruiting travel nurses and similar professionals who were on temporary assignment with AMN, even if those same travel nurses had applied to, were known by, and/or had previously been placed by, a competitor of AMN, as the instant case aptly shows.” The court further concluded that “instant action conferred a significant benefit on the public … [and] a large class of persons … namely, all current and former AMN California employees who had signed a CNDA containing a non-solicitation of employee provision similar to section 3.2 of the CNDA.”

The AMN Healthcare decision is significant for several reasons. The court’s expressed doubt as to the viability of Loral Corp. v. Moyes should give pause to both employers who regularly include such provisions in employment agreements and practitioners who advise employers as to the inclusion or enforceability of such provisions. While it could be argued the appellate court’s ruling should be limited to its facts because an employee non-solicitation clause easily restrains a recruiter from engaging in their “profession, trade, or business,” the AMN Healthcare court’s reasoning could be extended to other situations. Further, the court’s award of attorney’s fees under Code of Civil Procedure section 1021.5 provides a cautionary tale for employers attempting to enforce contractual provisions that run afoul of Business & Professions Code section 16600. Well-informed defendants will bring a cross-complaint seeking injunctive relief, and, if they prevail, could be entitled their attorney’s fees in doing so.

Of the various types of post-employment restrictions imposed on employees, a restriction on the recruitment of former co-workers (sometimes referred to as a “no-poach” or “anti-raiding” clause) is the type most likely to be enforced by a court. As a result, this is one type of post-employment restriction that is frequently drafted without the careful thought generally put in to traditional non-competes and client non-solicitation clauses.  But in what could be a foreshadowing of closer judicial scrutiny of co-worker non-solicitation clauses nationwide, the Wisconsin Supreme Court recently held that the Wisconsin non-compete statute applies to such clauses, and that the particular clause in question was unenforceable because it was not “reasonably necessary for the protection of the employer.”

Specifically, in Manitowoc Company v. Lanning, 2018 WI 6 (Jan. 19, 2018), the Wisconsin Supreme Court ruled that Wisconsin’s non-compete statute, Wis. Stat. § 103.465, broadly applies to restrictions on competition, including post-employment restrictions on the ability to solicit former co-workers.  In Lanning, the defendant, an engineer and former employee of the plaintiff, resigned and immediately began working for the plaintiff’s direct competitor. Defendant did not have a non-compete agreement but he did sign an employment agreement that included a non-solicitation clause that prohibited him from soliciting or inducing any employees from the plaintiff’s company to join a competitor within the two-year period following his resignation. After joining the competitor, defendant allegedly began to recruit employees to join the competitor company. Plaintiff argued that the defendant’s actions violated the non-solicit provision and sued him. The Wisconsin Supreme Court held that the non-solicitation provision was an unreasonable restraint on trade which failed to meet the statutory requirement that the restriction “be reasonably necessary for the protection of the employer.”

Wis. Stat. § 103.465 sets forth five requirements that must be met for a restrictive covenant to be enforceable. The restraint must: “(1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy.”

Here, the court looked to several factors when determining that the non-solicit provision was an unreasonable restriction on trade, including the fact that the provision contained no limitation based on the employee’s position, no limitation based on the employee’s “familiarity with or influence over a particular employee,” and no geographical limitation. The company argued that the provision was written to protect the company’s “investment of time and capital involved in recruiting, training and developing its employee base from ‘poaching’ by a ‘former employee who has full awareness of the talent and skill set of said employee base.’” The Court rejected this claim, instead determining that the provision was overbroad and restricted competitors’ access to the labor pool.

This case sends a message to employers that all types of post-employment restrictions on employees, even those which are not traditional non-compete agreements, should be drafted narrowly to protect legitimate business interests of the company, and should be no broader than necessary.

A bill has been introduced in the New York State Legislature, aiming to clarify the laws of non-compete and non-solicit agreements in New York.

Introduced by Assemblyman Phil Steck on January 15, 2015 and by State Senator Andrew Lanza on March 20, 2015, the bill (A2147/S4447) is entitled “Policy Against Restraint of Trade,” and operates from the premise that the Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999) has led to confusion in the law of non-competes, particularly in the application of a balancing test in which an employer’s interest in enforcing a non-compete or non-solicit covenant is weighed against the employee’s interest in earning a livelihood.

Among other things, if enacted, the bill could render non-competes and non-solicit agreements in New York unenforceable unless they are reasonable in time and/or geographic scope, and only if the employee or independent contractor:

(1) left the business voluntarily and is unique (i.e., possesses trade secrets of the business or confidential information akin to a trade secret);

(2) is the seller of any portion of the business; or

(3) is a “learned professional” other than a lawyer.

The bill currently sits in the Committee on Labor in both chambers of the legislature, and so is a long way from being enacted.  We will monitor and report on any further legislative progress of the bill.

I recently reported on a decision of Florida’s Fourth District Court of Appeal in which the appellate court reversed the issuance of an ex parte temporary injunction because the order failed to specify why it was granted without notice to the other party.

In a recent case, Florida’s Third District Court of Appeal (“DCA”) reversed the issuance of a temporary injunction for a similar reason: it failed to specify with reasonable particularity the conduct being enjoined. The case is Angelino v. Santa Barbara Enterprises, LLC, Case No. 3D08-1066 (Fla. 3d DCA, February 18, 2009).

The case involved a business dispute between the appellant, Sabrina Angelino, and Santa Barbara Enterprises, LLC, each of whom owned a fifty percent interest in Starbridge Networks, LLC, which sells telecommunications products and related technical services. Santa Barbara alleged that Angelino and her husband set up two competing companies, SILA Networks, LLC and SILA Networks, C.A., through which they usurped business opportunities that belonged to Starbridge Networks. Santa Barbara also alleged that Angelino interfered with Starbridge Networks’ relationships with its customers and suppliers.

In its order, the trial court found that Angelino, through SILA Networks, competed and interfered with Starbridge Networks’ business relationships in Venezuela. The trial court therefore enjoined Angelino, both individually and as an employee of SILA Networks LLC, her agents, servants, employees and attorneys from: (a) competing against Starbridge Networks; (b) usurping Starbridge Networks’ business opportunities, customers and suppliers; (c) using Starbridge Networks’ proprietary information and technology; and (d) interfering with Starbridge Network’s relationships with its customers and suppliers, including through the use of derogatory comments about Starbridge Networks, its officers, managers or employees.

The trial court also imposed a constructive trust. The trust encompassed any purchase orders, contracts or other business that Angelino, her agents, servants, employees and attorneys, may have obtained from Starbridge Networks’ customers.

The Third DCA reversed both the injunction and the imposition of a constructive trust. Citing the Fifth DCA’s decision in Clark v. Allied Assocs., Inc., 477 So. 2d 656, 657 (Fla. 5th DCA 1985), the court noted:

The trial court enjoined Angelino from competing against Starbridge Networks. But there is no mention of any acts that may be considered competitive in nature. The trial court enjoined Angelino from usurping Starbridge Networks’ business opportunities, customers, and suppliers. There is no mention, however, of any customers and suppliers with whom Angelino may not compete. The trial court also enjoined Angelino from the use of Starbridge Networks’ proprietary information and technology. There is no mention of any specifics upon which Angelino can rely to determine what information and technology he cannot use. This type of vague language is precisely the type that the district court contemplated in Clark, and we cannot uphold to support the entry of a temporary injunction.

The portion of the temporary injunction in which the trial court imposed a constructive trust is likewise overly broad. The trial court failed to mention with sufficient particularity “what purchase orders, contracts, or other business” Angelino is obligated to hold in a constructive trust. Angelino is left in doubt as to what he is required to do to comply with the trial court’s directives. This portion of the injunction is thus defective.

The takeaway from this court is clear. When drafting a proposed temporary injunction order, attorneys should use precise language that makes it abundantly clear what the other side can and cannot do. Trial judges in the state court system are extremely busy, and they may not be inclined to tailor language to the specific facts of the case. But that is what is required to avoid the reversal of the injunction on appeal. The Fifth DCA’s advice in Clark is worth reciting here:

An injunctive order should never be broader than is necessary to secure the injured party, without injustice to the adversary, relief warranted by the circumstances of the particular case. The order should be adequately particularized, especially where some activities may be permissible and proper. Such an order should be confined within reasonable limitations and phrased in such language that its requirements can be met, without resert to portions of the record or facts outside the ‘four corners’ of the injunction itself. One against whom an injunction is directed should not be left in doubt as to what he is required to do.

Clark, 477 So.2d at 477-78.