CA Labor & Employment Bulletin
56
February 2015
The Future of Loral and Employee Non-Solicit
Provisions
By Rick Bergstrom & Mhairi Whitton
Introduction
Recent high-profile cases involving challenges to antisolicitation agreements between companies under
antitrust laws have caused California employers to
question the continued enforceability of employee
non-solicitation provisions typically included in
proprietary/confidential information agreements. The
answer (at least for now) is - it depends.1
Non-Competes and Employee Non-Solicitation
Provisions
California’s general disdain for non-compete agreements is well publicized. Its broad public policy
prohibiting non-compete agreements is codified in
California Business & Professions Code section
16600. In general, this section provides that agreements
that prohibit a former employee from ‘‘competing’’
with his or her former employer, whether in the
context of joining a competitor company or founding
a competing entity, are unenforceable in California
except in limited circumstances defined by the
statute. 2 Further, in 2008 the California Supreme
Court determined that provisions preventing former
employees from competing with their former employers
by soliciting their customers (absent use of trade
secrets) are likewise void based on Section 16600.3
The law regarding agreements prohibiting an employee
from soliciting employees from former employers,
however, is far less clear at this point.
Employee non-solicitation agreements can be split
into two general categories: (a) no-hire provisions in
which an employee (or another company) agrees that
he or she will not hire other company employees; and
(b) non-solicitation provisions in which the employee
(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
non-solicitation agreements, with three main cases
providing the touchstones for determining a provision’s
enforceability.
For more than two decades, Webb v. West Side District
Hospital4 and Loral Corporation v. Moyes5 were the
seminal California cases concerning the enforceability
of non-solicitation provisions.6 Webb upheld the enforcement of a no-hire provision, and Loral held that
a non-solicitation agreement was valid. For more than
20 years, these two cases were the defining cases
regarding non-solicitation agreements, until the 2007
decision by the California Court of Appeal in VL
Systems, Inc. v. Unisen, Inc.,7 which held a no-hire
provision to be an unenforceable restraint on trade.
VL Systems, however, did not eviscerate the holdings
in either Webb or Loral, but rather reaffirmed the extent to which the breadth of the provision – and the
facts unique to each case – will come to bear on its
enforceability.
Webb and Loral: Two Decisions, Two Decades
In 1983, the court of appeal in Webb upheld a no-hire
agreement that was relatively narrowly tailored. West
Side District Hospital had entered into an agreement
with Dr. Harry Webb, whereby Webb would provide
West Side with physicians to staff the hospital’s emergency room in exchange for payment by West Side. The
agreement contained a provision whereby West Side
agreed that it would not hire (direct or indirectly) any
physician who had, through Webb, previously worked
for the hospital. If West Side breached this provision,
it would be required to pay Webb the sum of $30,000
per physician hired. After termination of the parties’
agreement, West Side, through a different contracting
company, hired four physicians who had previously
performed work at the hospital through Webb’s service.
4
144 Cal. App. 3d 946 (1983), disapproved on other
grounds in Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992).
5
1
The question of whether non-solicitation agreements
comply with anti-trust laws is outside the scope of this article.
2
3
CAL. BUS. & PROF. CODE § 16601.
Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 942
(2008).
174 Cal. App. 3d 268 (1985).
6
The 2006 decision in Strategix, Ltd. v. Infocrossing
West, Inc., 142 Cal. App. 4th 1068 (2006), addressed nonsolicitation provisions, but only in the context of the sale of
a business.
7
152 Cal. App. 4th 708 (2007).
CA Labor & Employment Bulletin
57
February 2015
In arbitration, West Side argued that the no-hire provision
rendered the contract void as an unenforceable restraint
on trade. The arbitrator disagreed and found for Webb – a
ruling which was confirmed by the superior court. On
appeal, the court addressed a two-pronged restraint on
trade argument: that the provision unreasonably restrained the hospital from hiring whom they chose, and
also restrained the physicians from plying their trade
as they wished.
they were not prevented from seeking employment
by contacting Moyes – they were only affected insomuch as Moyes could not contact them.11 In holding
the non-solicitation provision enforceable, the court
of appeal found that the provision ‘‘has no overall
negative impact on trade or business’’ and was therefore
‘‘not void on its face’’ under Section 16600.12
The court of appeal ultimately held that the $30,000
fee that would have to be paid by the hospital to
Webb per physician hired were reasonable and did
not illegally restrain trade. Indeed, as the court noted,
the fee was similar to the rate the hospital would
have had to pay to an employment agency to recruit a
physician. In addition, the appellate court held that the
no-hire provision did not constitute an unreasonable
restraint on the physicians, as they could still work at
the hospital, provided the hospital paid the ‘‘reasonable’’ fee.8
In the 22 years between Loral and VL Systems, California courts did not specifically address no-hire or
non-solicitation provisions, but continued to disfavor
restraints on employee mobility. More particularly,
court decisions trended towards supporting restrictive
covenants only to the degree ‘‘necessary to protect the
[prior] employer’s trade secrets.’’13 For instance, in
determining that customer non-solicitation agreements
are enforceable only to the extent necessary to protect
an employer’s legitimate trade secrets, the California
Court of Appeal reiterated the importance of having a
basis for the restrictive covenant separate and apart
from restraining trade for business purposes.14
Two years later, in Loral the court of appeal upheld a
different type of restrictive covenant: an agreement to
refrain from actively soliciting employees. Robert
Moyes was an executive with, and member of, the
Board of Directors of Loral Corporation when he
resigned his employment and signed a termination
agreement. Pursuant to the agreement, Moyes agreed
to preserve the confidentiality of Loral’s trade secrets
and confidential information, and to not ‘‘now or in
the future disrupt, damage, impair or interfere with
the business’’ of his prior employer. 9 Almost immediately upon securing new employment, Moyes
allegedly breached the agreement by offering employment to a number of Loral employees. Moyes’s
poaching of Loral’s employees caused the company to
spend over $400,000 recruiting replacement employees.
The trial court granted nonsuit to Moyes, agreeing with
his contention that the agreement was void under
Business and Professions Code section 16600 as an
unlawful restraint in trade.
The appellate court had a different take, holding that
the restriction on soliciting employees did ‘‘not appear
to be any more of a significant restraint . . . than a
restraint on solicitation of customers or on disclosure
of confidential information.’’10 The court noted that
unlike a no-hire provision, the non-solicitation agreement ‘‘only slightly affects’’ Loral employees, because
VL Systems: Distinguishing Webb and Loral
In the VL Systems case, VL Systems entered into a
consulting contract with Star Trac Strength for the provision of a relatively small amount of consulting services
(approximately 16 hours of work). The contract between
the two businesses included a provision that barred
Star Trac, for a period of 12 months after the consulting
agreement ended, from hiring any employee of VL
Systems (regardless of whether Star Trac had interacted
with that employee during Star Trac’s work for VL
Systems). In the event Star Trac breached this provision,
the contract provided for liquidated damages in the
amount of 60 percent of the annual compensation paid
to the hired individual. Months later and after Star
Trac’s work with VL Systems had ended, VL Systems
hired an engineer named David Rohnow. After only
two months on the job, Rohnow informed VL Systems
that he was resigning, but would stay on to train his
replacement. After he had already given notice to VL
Systems, Rohnow responded to an advertisement placed
by Star Trac and was eventually hired. The trial court
found for VL Systems and ordered Star Trac to pay the
liquidated damages.
11
174 Cal. App. 3d at 279.
12
174 Cal. App. 3d at 280.
13
8
Webb, 144 Cal. App. 3d at 954-55.
Metro Traffic Control, Inc. v. Shadow Traffic Network,
22 Cal. App. 4th 853, 859 (1994).
9
Loral, 174 Cal. App. 3d at 274.
14
10
174 Cal. App. 3d at 279.
Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425
(2003).
CA Labor & Employment Bulletin
In its 2007 decision, the court of appeal weighed the
‘‘important principle’’ of freedom of contract against
the ‘‘serious[] impact [to] a broad range of third
parties’’ that could result from the enforcement of nohire provisions.15 Finding that the holding in Webb
was not controlling ‘‘in light of its very different
facts.’’16 The appellate court noted that the scope of
the no-hire provision at issue in Webb was limited to
physicians who had actually worked for the hospital,
while the provision in VL Systems’ contract had no
such limitation as it applied equally to employees
with whom Star Trac had worked and those with
whom they had had no contact whatsoever. Similarly,
the court distinguished the Loral decision by pointing
to the different impact on employees. In Loral, the issue
was the direct solicitation of employees – not the hiring
of employees who had sought out the new employment
independently. The contract in VL Systems, however,
barred the hiring of employees – even when (as in
the case at issue) the employee was not solicited and
never even performed any work for Star Trac under its
contract with VL Systems. In finding the no-hire provision unenforceable, the court of appeal noted that it
was not taking a position on ‘‘whether a more narrowly
drawn and limited no-hire provision would be permissible under California law.’’17
The Continuing Application of Arthur Anderson
Neither Webb, Loral, nor VL Systems resulted in review
by the California Supreme Court, leaving open the
possibility that the State’s highest court may one day
either affirm the current law regarding employee nonsolicitation agreements or change the law entirely. The
supreme court most recently addressed issues concerning
provisions that restrain trade in the employment context
in Edwards v. Arthur Anderson, LLP.18 There, the court
found that a customer non-solicitation was an unlawful
non-compete and violated Section 16600. It is difficult
to predict, however, how the court would view an employee non-solicitation provision, and the outcome may
depend in large part on the language of the provision at
issue and the facts of the case.
15
VL Systems, 152 Cal. App. 4th at 713.
16
152 Cal. App. 4th at 713-14.
17
152 Cal. App. 4th at 718.
18
44 Cal. 4th 937, 942 (2008).
58
February 2015
What Now? The Current State of Employee
Non-Solicitation Agreements
By carefully noting that it could distinguish both
Webb and Loral, the court of appeal in VL Systems
evaded making a definitive statement about the enforceability of no-hire and non-solicitation provisions.
It did, however, give a roadmap for crafting a provision
that is likely to hold up under judicial scrutiny.
Provisions that outright bar the hiring of employees
are likely to be found unenforceable in many circumstances and should generally be avoided. Where such
provisions are used, they should be narrowly tailored,
apply only to employees with whom the restrained
individual works or becomes aware of during their
employment, and/or make any hiring contingent on
the payment of fixed sum liquidated damages.
Separately, non-solicitation agreements between employer and employee, like the one at issue in Loral,
are likely permissible with the caveat that they should
be limited in term and scope. The term of such provisions is typically limited to one or two years, and large
employers should consider limiting the scope to employees that the individual worked with and/or became aware of during the individual’s employment.
Rick Bergstrom is a partner in the San Diego office of
Jones Day, where his practice focuses on representing
corporate clients in complex litigation in federal and
state courts. He has significant experience defending
companies in wage and hour class actions, litigating
trade secret and employee mobility issues, whistleblower claims, public access/disability claims, and
advising companies regarding Affordable Care Act
employment issues.
Mhairi Whitton is an associate in Jones Day’s San
Diego office, where her practice focuses on employment
litigation. She has significant experience defending
corporate clients in state and federal court in single
plaintiff, multi-plaintiff, and class actions up to and
through trial.