California Business and Professions Code section 16600 invalidates any contract restraining anyone from engaging in a lawful profession, trade, or business.  While this language has been understood to prohibit non-compete agreements, it was generally understood that it still permitted employee “non-solicitation agreements,” which are agreements preventing former employees from poaching employees from their former employers.  In AMN Healthcare, Inc. v. AYA Healthcare Services, Inc.; et al., the California Court of Appeal called that prior understanding into serious question.

AMN involved an action between plaintiff AMN Healthcare, Inc. (“AMN”) and defendant AYA Healthcare Services, Inc. (“AYA”).  AMN and AYA were competitors in the business of providing temporary workers to medical care facilities across the country.  AMN brought suit against AYA and certain former AMN employees now working for AYA.  These former employees had previously worked for AMN as recruiters of temporary workers and had all executed Confidentially and Non-Disclosure Agreements with AMN which included a provision preventing them from soliciting any AMN employees to leave the service of AMN for a certain designated period of time.  AMN’s lawsuit alleged that these defendants had breached the terms of that agreement by recruiting temporary workers for AYA that AMN had previously employed.

Defendants countersued alleging that the non-solicitation provision in their employee contracts was invalid.  They subsequently moved for summary judgment.  The trial court granted the motion, determining that the clause was invalid under section 16600.  The Court of Appeal affirmed this ruling.

The Court of Appeal’s conclusion that the non-solicitation clause at issue violated section 16600 isn’t particularly surprising given the jobs of the defendant employees.  Specifically, and due to their roles as recruiters (along with the fact that AMN considered all of its temporary hires as employees), the non-solicitation clause constituted a de facto non-compete.  What is surprising, however, is the Court’s determination that the non-solicitation clause would be invalid under section 16600 regardless of the job duties of the employees in question because the clause constituted a restraint on the temporary workers’ ability to engage in their profession.

Employee non-solicitation clauses have become commonplace in employee agreements, including in employee severance agreements.  AMN, however, could signal an end to their continued viability.  We will continue to track future cases to determine if this case constitutes a changing of the tide or a mere blip.  Employers with operations in California, however, should consider limiting their use of such clauses as a general precaution because failing to do so could expose them to liability under California law.