Alan Foster

ARE NON-SOLICITATION AGREEMENTS AN ILLEGAL RESTRAINT OF TRADE?

Update

Alan Foster of the Foster Law Group wrote a very good article on non-solicitation agreements. He gave me permission to reprint it here. It is a good adjunct to my article regarding AMN Healthcare. Without further ado:

Although not directly holding non-solicitation agreements as illegal restraints of trade in violation of California law, two 2018 cases seem to be moving the Courts, and the law, in that direction.

In Donald Golden v. California Emergency Physicians Medical Group, et al., 896 F.3d 1018 (2018) the Ninth Circuit Court of Appeals held, if restrictions in a settlement agreement impose a “restraint of substantial character” on future employment, they run afoul of California Business and Professions Code Section 16600, as an illegal restraint upon a former employee even if they do not prevent the former employee from competing for business with the former employer.

The Court held that Section 16600 prevented any contract from imposing a “restraint of substantial character” on an individual’s employment, irrespective of whether it limited the individual’s ability to “compete”. The Appellate Court engaged in a de novo review of the lower court’s analysis of the degree to which the post-employment restrictions in the settlement agreement hampered plaintiff’s ability to practice medicine and reversed the lower court on the basis that the settlement agreement language clearly imposed a restraint of substantial character upon Dr. Golden’s ability to practice medicine.

The Golden decision supports the view that, under Section 16600, post-employment restrictions will be considered to impose a “restraint of substantial character” on employment irrespective of their impact on the ability of the former employer to compete.

In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 2018 Cal. App. LEXIS 989 (Nov. 1, 2018), the Court of Appeal of California, Fourth Appellate District, also held that employee non-solicitation agreements are void under California Business and Professions Code Section 16600 when such agreements restrain an individual from practicing their chosen profession, and indicated, in dicta, that employee non-solicitation agreements may be void in general under Section 16600, regardless of the circumstances. However, the Court of Appeal stopped short of holding that all nonsolicitation agreements are impermissible under California law. Yet, it expressed doubt over the continuing viability of older case law that applied a reasonableness standard to analyzing non-solicitation agreements.

California law has become extremely antithetical to non-solicitation agreements and companies should not assume they will be enforced by the Courts. Protection can still be provided through trade secret and confidential information agreements that impose enforceable restrictions on former employees so that the employer’s trade secret information is protected. If you are still using a non-solicitation agreement in your business that has not been reviewed for possible needed updates within the last several years, we suggest that you immediately contact your attorney to verify that it is still effective under current law.

Alan Foster provides strategic business planning, entity formation and ongoing counsel on operational issues, contracts, corporate finance and securities, intellectual property protection and counseling, employment and compensation, mergers and acquisitions, and real estate transactions.

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The Nuddleman Law Firm, P.C. represents employers and employees in a wide range of employment law matters. Much of his practice focuses on wage and hour issues, such as unpaid overtime, meal and rest break violations, designing or enforcing commission plans, and other wage-related claims. He also advises employers on how to avoid harassment and wrongful termination claims, and represents employees who have been victims of unlawful discrimination, retaliation or harassment. The Nuddleman Law Firm, P.C. helps employers develop good employment policies, and helps employers and employees with disability accommodation issues.