Carl Kanowsky | Court slams door on non-compete agreements
By Carl Kanowsky
Friday, November 16th, 2018

George worked for Nerds Alot, a headhunting outfit that provided high-tech companies with programmers and other worker bees that kept both the websites and their internal networks clicking along smoothly.

George found those programmers and then placed them with Nerds Alot’s customers.

Their customers might be Facebook, American Airlines, or any similar enterprise. What with Amazon’s announcement of needing 50,000 new people for its expansion on the East Coast, demand for Nerds Alot’s services increased.  

Even though George was slammed with work, he didn’t feel that his compensation reflected how valuable his services were. So, the headhunter (George) got headhunted himself. Geek Speakers, one of Nerds Alot’s main competitors, offered George a much better package, so he moved there.

Once he started his new job, he immediately called several of the folks he had placed when he worked for Nerds Alot.

Several of them jumped at the chance and left Nerds Alot.

Everyone was happy until Nerds Alot filed suit against George and Geek Speakers.

Essentially, the lawsuit alleged that George had signed a confidentiality agreement with Nerds Alot as an employee. In that agreement, George agreed not to steal Nerds Alot’s trade secrets, which included the names of the candidates placed with Nerds Alot’s customers.

Savvy business people know that California forbids non-compete agreements, except in a few limited circumstances. Unlike many other states, California has a stated public policy that prohibits employers from preventing their employees from working for the employers’ competitors.

Some companies have tried a back-door approach to get around the non-compete prohibition by having their employees sign confidentiality or non-disclosure agreements. Ostensibly, these agreements try to stop employees from stealing a company’s proprietary information and using that against the company.

That’s pretty legitimate: Coca-Cola should be able to prevent one of its employees from selling the formula for its drink, and KFC should be able to keep its “secret herbs and spices” just that — secret.

Many companies also insert into the agreements a provision by which the employee agrees not to lure away any other of the company’s employees for a year or two. This begins to tread closely to the public policy against non-compete agreements, but that issue hasn’t been resolved.

That is, until now.

In AMN Healthcare Inc. v. Aya Healthcare, the Court of Appeal reviewed a fact pattern quite similar to the one involving George and Nerds Alot.  

In AMN, Kylie, Robin and other headhunters worked for AMN, a company that provided travel nurses on a temporary basis.

The headhunters signed a non-disclosure agreement, or NDA, with AMN, which included a section that stated: “Employee shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of (AMN) to leave the service of (AMN).”  

Kylie and the others left AMN to work for Aya, one of AMN’s main competitors. As Aya recruiters, they hired many of AMN’s travel nurses. AMN sued Kylie, the other recruiters and Aya to stop this. The defendants urged rejection of the non-solicitation language.

The court considered AMN’s arguments why such a provision either was not a non-compete or was a permissible exception to the rule. The court rejected all of them.

First, the court ruled that since the nature of the defendants’ job (to be headhunters) involved hiring people, a prohibition against them hiring former co-employees amounted to an illegal non-compete. “This provision clearly restrained individual defendants from practicing with Aya their chosen profession — recruiting travel nurses.”

Then AMN argued that the identity of the travel nurses was a confidential trade secret. As such, AMN should be allowed to prevent disclosures of these nurses to competitors. The problems for AMN’s position were 1) that Aya already knew of many of these nurses because they had registered with both AMN and Aya, and 2) social media was a ready source for identifying and contacting the nurses. Thus, no trade secret. Thus, the defendants could discover the nurses’ identities without using any of AMN’s trade secrets.

So, this path around non-competes is closed.

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at cjk@kanowskylaw.com. His column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.

About the author

Carl Kanowsky

Carl Kanowsky

Carl Kanowsky | Court slams door on non-compete agreements

George worked for Nerds Alot, a headhunting outfit that provided high-tech companies with programmers and other worker bees that kept both the websites and their internal networks clicking along smoothly.

George found those programmers and then placed them with Nerds Alot’s customers.

Their customers might be Facebook, American Airlines, or any similar enterprise. What with Amazon’s announcement of needing 50,000 new people for its expansion on the East Coast, demand for Nerds Alot’s services increased.  

Even though George was slammed with work, he didn’t feel that his compensation reflected how valuable his services were. So, the headhunter (George) got headhunted himself. Geek Speakers, one of Nerds Alot’s main competitors, offered George a much better package, so he moved there.

Once he started his new job, he immediately called several of the folks he had placed when he worked for Nerds Alot.

Several of them jumped at the chance and left Nerds Alot.

Everyone was happy until Nerds Alot filed suit against George and Geek Speakers.

Essentially, the lawsuit alleged that George had signed a confidentiality agreement with Nerds Alot as an employee. In that agreement, George agreed not to steal Nerds Alot’s trade secrets, which included the names of the candidates placed with Nerds Alot’s customers.

Savvy business people know that California forbids non-compete agreements, except in a few limited circumstances. Unlike many other states, California has a stated public policy that prohibits employers from preventing their employees from working for the employers’ competitors.

Some companies have tried a back-door approach to get around the non-compete prohibition by having their employees sign confidentiality or non-disclosure agreements. Ostensibly, these agreements try to stop employees from stealing a company’s proprietary information and using that against the company.

That’s pretty legitimate: Coca-Cola should be able to prevent one of its employees from selling the formula for its drink, and KFC should be able to keep its “secret herbs and spices” just that — secret.

Many companies also insert into the agreements a provision by which the employee agrees not to lure away any other of the company’s employees for a year or two. This begins to tread closely to the public policy against non-compete agreements, but that issue hasn’t been resolved.

That is, until now.

In AMN Healthcare Inc. v. Aya Healthcare, the Court of Appeal reviewed a fact pattern quite similar to the one involving George and Nerds Alot.  

In AMN, Kylie, Robin and other headhunters worked for AMN, a company that provided travel nurses on a temporary basis.

The headhunters signed a non-disclosure agreement, or NDA, with AMN, which included a section that stated: “Employee shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of (AMN) to leave the service of (AMN).”  

Kylie and the others left AMN to work for Aya, one of AMN’s main competitors. As Aya recruiters, they hired many of AMN’s travel nurses. AMN sued Kylie, the other recruiters and Aya to stop this. The defendants urged rejection of the non-solicitation language.

The court considered AMN’s arguments why such a provision either was not a non-compete or was a permissible exception to the rule. The court rejected all of them.

First, the court ruled that since the nature of the defendants’ job (to be headhunters) involved hiring people, a prohibition against them hiring former co-employees amounted to an illegal non-compete. “This provision clearly restrained individual defendants from practicing with Aya their chosen profession — recruiting travel nurses.”

Then AMN argued that the identity of the travel nurses was a confidential trade secret. As such, AMN should be allowed to prevent disclosures of these nurses to competitors. The problems for AMN’s position were 1) that Aya already knew of many of these nurses because they had registered with both AMN and Aya, and 2) social media was a ready source for identifying and contacting the nurses. Thus, no trade secret. Thus, the defendants could discover the nurses’ identities without using any of AMN’s trade secrets.

So, this path around non-competes is closed.

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at cjk@kanowskylaw.com. His column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.