If there were shades of grey in the state of enforceability of employee non-solicitation provisions (to prevent attempts to and/or the hire of former colleagues), that outlook just got darker. California law has declared void “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” (Business & Professions Code section 16600.) Over the past five years, California courts have increasingly relied on Section 16600 to invalidate non-solicitation provisions.
In the 1985 case, Loral Corporation v. Moyes, the California Court of Appeals upheld an agreement restraining a former executive from raiding his former employer’s employees because it was a reasonable restraint on trade. That was the law for three decades. However, in 2018, the California Court of Appeals invalidated a non-solicitation of employees clause in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., relying on the specific fact that plaintiffs were recruiters such that upholding the provision would, in effect, restrain them from engaging in their chosen profession. Then, in 2019, a U.S. District Court in Barker v. Insight Global, boldly struck down a non-solicitation provision as unenforceable under California Business & Professions Code Section 16600, despite Loral and AMN, rejecting that fact-specific application.
With the passage of SB 699, continued use of non-solicitation provisions in California is riskier than ever. As my colleagues Jeffrey Horton Thomas and Michelle Harrington wrote, before the adoption of section 16600.5, individuals suing in California to invalidate restrictive covenants had no basis to recover damage awards or attorney’s fees. While individuals could seek restitution, that dollar figure is different than a damages award and often less than a damages award. But, effective January 1, 2024, section 16600.5 authorizes employees, former employees, and applicants to recover damage awards, injunctive relief, and attorney’s fees and costs against their employers when they prevail in invalidating restrictive covenants, without a corresponding provision for employers who prevail in litigation.
The incentive to litigate employee non-solicitation clauses (including anti-raiding provisions) has increased exponentially and is likely to chill any further use of these provisions against California-based employees.