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Uncertain Future: Are Agreements Not to Solicit Employees Still Enforceable?

Posted in Trade Secrets and Competition

California courts have long held that agreements that prohibit a former employee from hiring a former co-worker are void.  These decisions are based on California’s fundamental public policy (which is codified in Business & Professions Code section 16600) protecting workers’ rights to pursue any lawful trade or profession.  With only a few narrow exceptions, California law prohibits such limitations on employment opportunities.  Simply put, when two
parties agree that they will not hire a particular group of workers, they limit the opportunities of those workers in an impermissible way.

In 1985 however, a California Court of Appeal drew a distinction between agreeing not hire someone and agreeing not to solicit that same worker. In Loral v. Moyes the Court upheld an agreement by a departing employee not to recruit or solicit his former coworkers.  The Court upheld the agreement because, among other things, it restricted only the contracting party’s conduct and did not limit the prospects or employment opportunities of the former co-workers.  While the former employee could not solicit any of his former co-workers to come to work for him or her, any of them were free to seek out the former employee for employment.  The Loral decision has been criticized for improperly drawing a distinction where none was needed.

Flawed or not, the Loral court’s reasoning led to the widespread use of employee non solicitation agreements in California. In 2009, however, in Edwards v. Arthur Andersen, the California Supreme Court unsettled the Loral case when it held — without overruling Loral — that customer non-solicitation agreements violate Business and Professions Code section 16600. The Edwards decision has led many to forecast the demise of Loral, but so far at least, the rule expressed in Loral remains the law.   Where future courts will go on this question remains uncertain.

Loral concerns the enforceability of agreements between an employer and its employees, but what about agreements between competitors that they will not solicit one another’s employees? Recent class action lawsuits alleging that Apple, Inc. and Google, Inc. (among others) violated the law by agreeing not to recruit one another’s employees may answer that question. These lawsuits were filed shortly after the U.S. Department of Justice settled a claim with Google and Apple that agreements not to cold call one another’s workers violated federal anti-trust law.  That settlement does not admit wrongdoing, but does commit the companies to not enter into such agreements in the future.  The civil complaints (which have yet to be certified as class actions) have been consolidated before in the U.S. District Court in San Jose.

Stay tuned.