The law in California is well settled that, with few exceptions, non-compete agreements are unenforceable. Less clear is whether and to what extent employee non-solicitation and no-hire agreements can withstand a court’s scrutiny. These types of agreements often exist between employers and employees, as well as between employers themselves. And while non-solicitation provisions containing broad language prohibiting direct or indirect solicitation are common, there is significant confusion over the extent of their enforceability in California. Are these agreements enforceable? As is often the case, the answer is “it depends.” Fortunately, there are a handful of published appellate cases highlighting the fine distinctions that guide the analysis:
- A case for the narrowly tailored no-hire agreement: in Webb v. West Side District Hospital, West Side Hospital and Webb, individually, entered into a contract “requiring Webb to furnish competent physicians to staff the hospital’s emergency room.” As part of the agreement, West Side agreed that it would not hire, directly or indirectly, any physician who, through Webb, previously provided services to the hospital. Any breach by West Side would require it to pay Webb $30,000 per physician. West Side later hired four such physicians and refused to pay the agreed-upon fee. The court of appeal upheld the parties’ agreement, finding that the fee was reasonable and did not unlawfully restrain trade or physicians’ livelihoods: “the physicians were not precluded from working at the hospital’s emergency room facilities, but their employment was merely conditioned upon payment by the hospital of a reasonable fee.”
- A permissible anti-raiding provision: in Loral Corp. v. Moyes, Moyes signed a termination agreement with his then-employer, Loral, agreeing that he would not now or ever “disrupt, impair or interfere” with Loral’s business by “raiding its employees.” Moyes subsequently offered jobs to two of Loral’s employees. The court of appeal found that the anti-raiding provision had “no overall negative impact on trade or business.” Loral employees were “not hampered from seeking employment [with Moyes’ new employer] nor from contacting Moyes. All they los[t] [wa]s the option of being contacted by him first.”
- An unenforceable no-hire agreement made in the context of a business sale: in Strategix, Ltd. v. Infocrossing West, Inc., Strategix sold most of its assets and goodwill to Infocrossing and, as part of the deal, entered into an agreement to provide consulting services. The consulting agreement prohibited Strategix from soliciting Infocrossing’s employees for a year after termination of the agreement. The appeals court found that the non-solicitation was overbroad and not sufficiently tailored: “nonsolicitation covenants barring the seller from soliciting all employees . . . of the buyer, even those who were not former employees . . . of the sold business, extend their anticompetitive reach beyond ‘the business so sold.’”
- Another no-hire agreement that didn’t make the cut: in VL Sys., Inc. v. Unisen, Inc., VL entered into a contract with Unisen for consulting services that included a provision barring Unisen, for 12 months after the consulting contract ended, from hiring any VL employees. The contract provided that, if Unisen breached, it would have to pay VL 60% of the hired employee’s annual salary. Distinguishing itself from Webb, which was limited to only the physicians who had actually performed services for the hospital, and further distinguishing from Loral, which did not prevent employees from independently seeking employment, the court of appeals found this provision unenforceable since it would have prevented Unisen from hiring any VL employees under any
This patchwork of case law leaves employers and practitioners alike with some valuable guideposts. As always, we’ll be reporting promptly if and when the courts provide more insight. Stay tuned.