The California Court of Appeal also concluded that a “customer list” of identities and contact information was not protectable as a trade secret.
In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., the California Court of Appeal on November 1 held that under the facts presented, a nonsolicitation of employee provision was an improper restraint on the individual defendants’ ability to engage in their profession, in violation of California Business and Professions Code Section 16600. Although the case may possibly be limited to the facts, the court’s holding calls into question the continued viability of Loral Corp. v Moyes, 174 Cal.App.3d 268 (1985), a case long relied on to support the proposition that nonsolicitation of employee provisions are enforceable in the state of California.
AMN and Aya are competitors in the business of providing, on a temporary basis, healthcare professionals, particularly “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. As a condition of employment with AMN, each of the individual defendants had signed a Confidentiality and Non-Disclosure Agreement, which included a provision preventing the individual defendants from soliciting any employee of AMN to leave the service of AMN for at least a one-year period. A travel nurse was deemed to be an employee of AMN while on temporary assignment through AMN.
In ruling on the motion for summary judgment, the trial court concluded that under California law, the nonsolicitation of employee provision was an unlawful restraint on trade in violation of Section 16600 because it prevented the individual defendants from engaging in their lawful trade or profession—soliciting and recruiting travel nurses on temporary assignment with AMN—for at least one year post termination. In addition, the trial court found no evidence of misappropriation of trade secrets after concluding that a customer list of names and identities and other information did not qualify as trade secrets and their disclosure and use did not cause any harm to the plaintiff.
Nonsolicitation of Employee Provision
The court of appeal affirmed the trial court’s grant of summary judgment and concluded the trial court’s injunction preventing enforcement of the nonsolicitation of employee provision and award of attorney fees was proper. Preliminarily, the court noted that Section 16600 voids “every contract by which anyone is retrained from engaging in a lawful profession, trade or business of any kind” unless it falls within one of Section 16600’s three statutory exceptions (sale of goodwill or interest in a business, dissolution of a partnership, or dissolution or sale of limited liability company) (citing Edwards v Arthur Andersen LLP, 44 Cal 4th 937, 945 (2008) (Edwards).
In analyzing the facts of this case, the court concluded that the provision at issue “clearly restrained individual defendants from practicing with Aya their chosen profession – recruiting travel nurses on 13-week assignments with AMN." The court noted that the provision at issue would restrict the number of nurses with whom a recruiter could work while employed by his or her new staffing agency and that not being permitted to contact travel nurses who currently work for AMN could limit the recruiter’s compensation.
In issuing its decision that the nonsolicitation provision violates Section 16600, the court expressed “doubt” about the continued viability of Loral Corp. v. Moyes, which was decided before Edwards. The AMN court stated that Moyes used a reasonableness standard in analyzing the nonsolicitation clause which “appears to conflict with Edward’s” rejection of the Ninth Circuit narrow restraint exception to 16600. In Edwards, the California Supreme Court had rejected the view of some courts that Section 16600 only prohibits restraints that were unreasonable or overbroad.
The AMN court also found that Moyes was factually distinguishable. Unlike the former employee in Moyes, who was an executive officer of the plaintiff employer, in the instant case, individual defendants were in the business of recruiting and placing on a temporary basis medical professionals, primarily nurses, in medical facilities throughout the country. The court reasoned that if enforced, the nonsolicitation of employee provision thus restrained individual defendants from engaging in their chosen profession, even in a "narrow" manner or a "limited" way. (Citing Edwards, 44 Cal.4th at p. 948.)
Trade Secrets Exception
The court also addressed the so-called common law “trade secrets exception” to Section 16600. In the seminal case, The Retirement Group v. Galante (2009) 176 Cal.App.4th 1226, 1233-1234 (Galante), the court had concluded that “conduct is enjoinable not because it falls within a judicially created ‘exception’ to section 16600’s ban on contractual nonsolicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking.” Agreeing with Galante, the AMN court held that a plaintiff can seek an injunction to prevent the actual or threatened improper acquisition, use, or disclosure of trade secrets, but cannot obtain an injunction to enforce a noncompete provision on the grounds that the covenant is designed to protect trade secrets.
Misappropriation of Trade Secrets
With respect to the plaintiff’s cause of action for misappropriation of trade secrets under the California Uniform Trade Secrets Act, the court concluded the evidence showed that the identity and contact information of travel nurses that AMN claimed to be “secret” were already known to Aya before any of the individual defendants left AMN and went to work for Aya. Many of these travel nurses had previously applied for jobs at Aya, disclosed to their recruiters the terms of their pay packages and offers presented by competing agencies, and belonged to a public social media platform that enables members to access the profile names of all 30,000 members as means of trying to “friend” or “message them.” The court noted that the identity and contact information at issue was “very general” in nature and was readily ascertainable on social media and by word of mouth, and was acquired by the individual defendant recruiters, not by accessing a proprietary database, but rather as a result of them working with, and in some cases, becoming personal friends with, travel nurses who tended to seek employment with multiple staffing agencies.
The court also concluded that an email that one of the individual defendants forwarded to Aya while she was still an employee of AMN was not protectable as a trade secret because it “very generally” addressed information about Aya and some of the terms it used in competing with AMN to recruit travel nurses. Finally, the court determined that a list of names and email addresses of nurses that one of the individual defendant recruiters forwarded to a personal email account while employed by AMN and shortly before she accepted employment with Aya, was never actually used to contact or place any travel nurses at Aya. The court concluded that AMN was neither harmed by any such disclosure nor was such a disclosure a “substantial factor” in causing AMN any harm.
It remains to be seen whether the holding in this case will be applied outside the recruiter context where the nonsolicitation of employees’ provision essentially acted as a noncompete. The court suggested that Moyes conflicted with the interpretation of Section 16600 in Edwards, although it also found that Moyes was factually distinguishable. Whether courts will enforce such provisions going forward may turn on the industry in which the employee works and employee’s job function. Given the uncertainty created by this decision, employers should consult with experienced legal counsel about the continued use of employee nonsolicitation provisions in their California agreements and before filing lawsuits seeking to enforce such provisions against former employees in California, especially where the relief sought may arguably prevent the former employees from “engaging in their chosen profession” and thus potentially violate fundamental public policy in California against noncompetes.
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John S. Battenfeld