The Enforceability Of Employee Non-Solicits Remains Unclear In California

The high profile lawsuit filed on February 11, 2014 by Anschutz Entertainment Group against Shervin Mirhashemi and his new employer, Legends Hospitality, LLC, again raises the question of when a California Court of Appeal will decide whether employee non-solicits are enforceable in California. The Complaint alleges that Mirhashemi started as an AEG in-house attorney and was promoted over time to executive positions and was paid millions of dollars. The Complaint also alleges that Mirhashemi signed various employment agreements at least one of which provided, in part, that he would not “directly or indirectly” “participate in any effort to entice away from [AEG] … any person who is employed by [AEG].”

Is the foregoing language an enforceable covenant or a violation of California public policy?

The 1985 California Court of Appeal decision in Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985) held that the employee non-solicit provision at issue was enforceable for at least one year because California Business & Professions Code §16600 “does not necessarily affect an agreement that delimits how he can compete.” Id. at 276. It concluded that the employee non-solicit was enforceable because it “only slightly affects” the employees at issue. Id. at 279.

When the California Supreme Court rendered decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) and held that customer non-solicits were unenforceable, it noted that Edward’s agreement likewise contained an employee non-solicit, but since Edwards did not dispute that portion of the agreement or contend that it was unenforceable, it did not address the employee-non-solicit in its holding. Id. at fn. 4. The Court in Anderson held that all non-competes that do not fall within the three statutory exceptions are invalid and it further held that the “limited” or “narrow” restraint exception developed by the Ninth Circuit was not the law in California. Based on the analysis in Edwards, it is unclear whether the Loral Court’s conclusion that a provision which “delimits how [an employee] can compete” and is enforceable because it “only slightly affects” employee mobility can be squared with Anderson’s holding that there is no narrow restraint exception in Section 16600.

The determination of this issue will resolve a significant open issue in California unfair competition law.