While many states authorize employers to use fairly broad non-compete and non-solicitation provisions in contracts with their employees, California has what are likely the most restrictive and employee-friendly laws regulating these issues in the country. Under California law, except in rare circumstances, these types of provisions are generally not enforceable. Employers are often left to rely solely on trade secret protections as their sole means of restricting an ex-employee’s use of confidential information for the benefit of a new employer. While this type of protection provides a modicum of protection to an employer by providing a remedy in the event an employee pilfers a company’s trade secret information and takes it down the road to a competitor, it certainly does not provide an employer with all of the protections that its counterparts in other states enjoy. A recent California case chips away at employers’ options even further.
In November, the California Court of Appeal issued an opinion in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., et al., addressing the validity of non-solicitation clauses. AMN sued Aya and four former employees of AMN who had recently moved to Aya, claiming AMN and the former employees had violated a non-solicitation clause in the former employees’ contracts. This clause, according to AMN, operated to bar any former employees of AMN from soliciting AMN’s clients and employees for an amount of time between 12 and 18 months following the employee’s departure, depending on the client and employee.
AMN and Aya are both traveling nurse agencies, which place traveling nurses and other medical professionals in hospitals and medical centers for short periods of time. While these nurses completed their assigned placements coordinated by AMN, the nurses were considered by AMN to be AMN employees. Defendants, former AMN employees who had worked as recruiters for AMN, did the same job for Aya. At the beginning of the former employees’ employment with AMN, AMN required an employment contract be signed which included a non-solicitation clause.
When the former employees left AMN for Aya, AMN noticed a small number of traveling nurses also began taking assigned placements from Aya. AMN believed these traveling nurses had been solicited and ultimately poached by the former employees for the benefit of Aya, and AMN accordingly filed suit because it believed that these nurses were AMN “employees” who could not be solicited by Aya or its new, ex-AMN recruiters.
The Superior Court decided, and the Court of Appeal affirmed, that AMN’s case was without merit. The Court of Appeal first found that, under the somewhat unique circumstances of the case, enforcing the non-solicitation clause was a direct violation of California’s strict rule invalidating any restriction on a person’s right to practice his or her profession. Because the former employees were recruiters by trade, AMN’s attempt to keep the former employees from recruiting traveling nurses who had ever worked for AMN on behalf of Aya amounted to a restriction on the former employees’ ability to practice their profession. However, the Court of Appeal left open the possibility that these clauses can be valid if the former employees are using trade secrets of their former employer.
The most important trade secret in this case was the company’s pay structure. The Court of Appeal noted that if a competitor knows of a company’s pay scale, it can easily offer a more attractive compensation package to a company’s top employees. This type of raiding, using information that is obviously meant to be kept secret (with few exceptions), does not further the policy behind promoting an employee’s ability to leave one employer for a competing employer. Thus, if a former employee is using trade secret information of his former employer on behalf of his new employer, that former employee is likely liable for doing so.
AMN argued that the identity of its travelling nurses was in fact a trade secret, and by using that information on behalf of Aya, the former employees had still wronged AMN. The Court of Appeal disagreed because the traveling nurses at issue had applied for work with Aya and were in Aya’s database before the AMN employees had started working for Aya, rendering any argument that their identities were AMN’s trade secrets hopeless.
While the unique circumstances of this case make its further application a bit unclear, it does represent a further chipping away at the protections an employer may have to keep its employees from leaving and utilizing information learned at their old company for the benefit of a new one. It is also a great reminder that employment contracts should be reviewed periodically to make sure they are in line with current law. Please contact NavBat if you have questions about how to best protect your company’s important information from walking out the door with a former employee without running afoul of the law yourself.