CA Labor & Employment Bulletin 56 February 2015 The Future of Loral and Employee Non-Solicit Provisions By Rick Bergstrom & Mhairi Whitton Introduction providing the touchstones for determining a provision’s enforceability. Recent high-profile cases involving challenges to anti- solicitation agreements between companies under For more than two decades, Webb v. West Side District Hospital 4 and Loral Corporation v. Moyes 5 were the antitrust laws have caused California employers to question the continued enforceability of employee seminal California cases concerning the enforceability of non-solicitation provisions. 6 Webb upheld the en- non-solicitation provisions typically included in proprietary/confidential information agreements. The forcement of a no-hire provision, and Loral held that answer (at least for now) is - it depends. 1 a non-solicitation agreement was valid. For more than 20 years, these two cases were the defining cases Non-Competes and Employee Non-Solicitation regarding non-solicitation agreements, until the 2007 Provisions decision by the California Court of Appeal in VL Systems, Inc. v. Unisen, Inc ., 7 which held a no-hire California’s general disdain for non-compete agree- provision to be an unenforceable restraint on trade. ments is well publicized. Its broad public policy VL Systems , however, did not eviscerate the holdings prohibiting non-compete agreements is codified in in either Webb or Loral , but rather reaffirmed the ex- California Business & Professions Code section tent to which the breadth of the provision – and the 16600. In general, this section provides that agreements facts unique to each case – will come to bear on its that prohibit a former employee from ‘‘competing’’ enforceability. with his or her former employer, whether in the context of joining a competitor company or founding Webb and Loral : Two Decisions, Two Decades a competing entity, are unenforceable in California except in limited circumstances defined by the In 1983, the court of appeal in Webb upheld a no-hire statute. 2 Further, in 2008 the California Supreme agreement that was relatively narrowly tailored. West Court determined that provisions preventing former Side District Hospital had entered into an agreement employees from competing with their former employers with Dr. Harry Webb, whereby Webb would provide by soliciting their customers (absent use of trade West Side with physicians to staff the hospital’s emer- secrets) are likewise void based on Section 16600. 3 gency room in exchange for payment by West Side. The The law regarding agreements prohibiting an employee agreement contained a provision whereby West Side from soliciting employees from former employers, agreed that it would not hire (direct or indirectly) any however, is far less clear at this point. physician who had, through Webb, previously worked for the hospital. If West Side breached this provision, Employee non-solicitation agreements can be split it would be required to pay Webb the sum of $30,000 into two general categories: (a) no-hire provisions in per physician hired. After termination of the parties’ which an employee (or another company) agrees that agreement, West Side, through a different contracting he or she will not hire other company employees; and company, hired four physicians who had previously (b) non-solicitation provisions in which the employee performed work at the hospital through Webb’s service. (or another company) agrees that he or she will not solicit other company employees. There is a dearth of authority in California regarding both forms of 4 144 Cal. App. 3d 946 (1983), disapproved on other non-solicitation agreements, with three main cases grounds in Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992). 5 174 Cal. App. 3d 268 (1985). 1 The question of whether non-solicitation agreements 6 The 2006 decision in Strategix, Ltd. v. Infocrossing comply with anti-trust laws is outside the scope of this article. West, Inc ., 142 Cal. App. 4th 1068 (2006), addressed non- 2 C AL . B US . & P ROF . C ODE § 16601. solicitation provisions, but only in the context of the sale of a business. 3 Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 942 7 (2008). 152 Cal. App. 4th 708 (2007).
CA Labor & Employment Bulletin 57 February 2015 In arbitration, West Side argued that the no-hire provision they were not prevented from seeking employment rendered the contract void as an unenforceable restraint by contacting Moyes – they were only affected inso- much as Moyes could not contact them . 11 In holding on trade. The arbitrator disagreed and found for Webb – a ruling which was confirmed by the superior court. On the non-solicitation provision enforceable, the court appeal, the court addressed a two-pronged restraint on of appeal found that the provision ‘‘has no overall trade argument: that the provision unreasonably re- negative impact on trade or business’’ and was therefore ‘‘not void on its face’’ under Section 16600. 12 strained the hospital from hiring whom they chose, and also restrained the physicians from plying their trade as they wished. VL Systems : Distinguishing Webb and Loral The court of appeal ultimately held that the $30,000 In the 22 years between Loral and VL Systems , Cali- fee that would have to be paid by the hospital to fornia courts did not specifically address no-hire or Webb per physician hired were reasonable and did non-solicitation provisions, but continued to disfavor not illegally restrain trade. Indeed, as the court noted, restraints on employee mobility. More particularly, the fee was similar to the rate the hospital would court decisions trended towards supporting restrictive have had to pay to an employment agency to recruit a covenants only to the degree ‘‘necessary to protect the [prior] employer’s trade secrets.’’ 13 For instance, in physician. In addition, the appellate court held that the no-hire provision did not constitute an unreasonable determining that customer non-solicitation agreements restraint on the physicians, as they could still work at are enforceable only to the extent necessary to protect the hospital, provided the hospital paid the ‘‘reason- an employer’s legitimate trade secrets, the California able’’ fee. 8 Court of Appeal reiterated the importance of having a basis for the restrictive covenant separate and apart Two years later, in Loral the court of appeal upheld a from restraining trade for business purposes. 14 different type of restrictive covenant: an agreement to refrain from actively soliciting employees. Robert In the VL Systems case, VL Systems entered into a Moyes was an executive with, and member of, the consulting contract with Star Trac Strength for the provi- Board of Directors of Loral Corporation when he sion of a relatively small amount of consulting services resigned his employment and signed a termination (approximately 16 hours of work). The contract between agreement. Pursuant to the agreement, Moyes agreed the two businesses included a provision that barred to preserve the confidentiality of Loral’s trade secrets Star Trac, for a period of 12 months after the consulting and confidential information, and to not ‘‘now or in agreement ended, from hiring any employee of VL the future disrupt, damage, impair or interfere with Systems (regardless of whether Star Trac had interacted the business’’ of his prior employer. 9 Almost im- with that employee during Star Trac’s work for VL mediately upon securing new employment, Moyes Systems). In the event Star Trac breached this provision, allegedly breached the agreement by offering em- the contract provided for liquidated damages in the ployment to a number of Loral employees. Moyes’s amount of 60 percent of the annual compensation paid poaching of Loral’s employees caused the company to to the hired individual. Months later and after Star spend over $400,000 recruiting replacement employees. Trac’s work with VL Systems had ended, VL Systems The trial court granted nonsuit to Moyes, agreeing with hired an engineer named David Rohnow. After only his contention that the agreement was void under two months on the job, Rohnow informed VL Systems Business and Professions Code section 16600 as an that he was resigning, but would stay on to train his unlawful restraint in trade. replacement. After he had already given notice to VL Systems, Rohnow responded to an advertisement placed The appellate court had a different take, holding that by Star Trac and was eventually hired. The trial court the restriction on soliciting employees did ‘‘not appear found for VL Systems and ordered Star Trac to pay the to be any more of a significant restraint . . . than a liquidated damages. restraint on solicitation of customers or on disclosure of confidential information.’’ 10 The court noted that unlike a no-hire provision, the non-solicitation agree- 11 ment ‘‘only slightly affects’’ Loral employees, because 174 Cal. App. 3d at 279. 12 174 Cal. App. 3d at 280. 13 Metro Traffic Control, Inc. v. Shadow Traffic Network, 8 Webb , 144 Cal. App. 3d at 954-55. 22 Cal. App. 4th 853, 859 (1994). 9 Loral , 174 Cal. App. 3d at 274. 14 Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 10 174 Cal. App. 3d at 279. (2003).
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