Reed Smith Client Alerts

Under California Business and Professions Code Section 16600 (“Section 16600”), “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” California courts interpret this statute broadly and have routinely invalidated covenants not to compete as violating Section 16600 based on the theory that such covenants contravene California’s public policy in favor of free competition and the right of employees to pursue any calling of their choosing.

No-rehire provisions, wherein an employee agrees to give up his or her right to any future employment with a prior employer, are routine provisions in settlement agreements that previously have escaped the scope of Section 16600 – until Golden v. California Emergency Physicians Medical Group, No. 12-16514 (9th Cir. Apr. 8, 2015).

Golden involved the settlement of various state and federal law claims by Dr. Donald Golden against California Emergency Physicians Medical Group (“CEP”), a large consortium of more than 1,000 physicians that manages or staffs many emergency rooms, inpatient clinics, and other facilities in California and other states. Dr. Golden had been a doctor in an emergency room affiliated with CEP. In resolution of his claims before trial, Dr. Golden and CEP entered into a settlement agreement. It provided for a substantial monetary payment to Dr. Golden in exchange for his general release of all claims, as well as his waiving any and all future rights to employment with CEP, or any facility with which CEP had, or may in the future have, an ownership or contractual relationship. In addition to this broad waiver, the settlement agreement provided that if CEP took over a facility where Dr. Golden already was working, CEP could terminate his employment without liability: “if CEP contracts to provide services to, or acquires rights in, a facility that is an emergency room…at which Golden is employed or rendering services, CEP has the right to and will terminate Golden from any work in the emergency room without any liability whatsoever.”

Reversing the U.S. District Court for the Northern District of California, the Ninth Circuit majority held that Section 16600 broadly applied to all contractual restraints on professional practices. The Ninth Circuit disagreed with the District Court that the analysis under Section 16600 ended with whether the agreement constituted a covenant not to compete.

In reaching its conclusion, the Ninth Circuit acknowledged that the California Supreme Court had never ruled expressly that Section 16600 applied only to typical non-compete covenants. Nevertheless, the Ninth Circuit reasoned that the plain text of Section 16600 did not “specifically target covenants not to compete,” but instead voided “every contract” that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.” (emphasis added.) The Circuit Court also analyzed California Supreme Court cases interpreting Section 16600 and concluded that these cases had consistently considered Section 16600 to prohibit any type of contract that posed a restraint on an individual’s ability to practice his or her profession – not just restraints on the individual’s ability to compete with his or her former employer.

The Ninth Circuit refrained from addressing whether Dr. Golden’s settlement agreement did indeed violate Section 16600 as a “restraint of substantial character to Dr. Golden’s medical practice,” but rather remanded the case to the District Court for further proceedings.

The Ninth Circuit’s holding in Golden significantly affects the permissible content in settlement agreements. After Golden, an employer must now examine not simply whether the settlement agreement restricts the employee’s right to compete, but rather whether it presents “a restraint of a substantial character, no matter its form or scope.” By effectively limiting an employer’s ability to include a no-rehire provision in a settlement agreement – or at the very least, narrowing the scope of a permissible no-rehire provision – Golden has opened the door for retaliation claims against the settling employer (claims that otherwise would have been foreclosed by a settlement agreement). The employee merely has to arrive back on the former employer’s doorstep, apply for reemployment and be denied, and the employee may have a colorable claim that the denial was retaliation for the prior, settled claims. The result going forward will be very hollow settlements that provide no certain peace for the employer.


Client Alert 2015-093