United States: Ninth Circuit Confirms "No Re-Hire" Clauses Can Constitute Unlawful Restraints Of Trade In California

Co-Authored by Sierra J. Chinn-Liu

Back in 2015, we covered the divided holding of the Ninth Circuit in Golden v. California Emergency Physicians Medical Group, that a "no re-hire" provision in a settlement agreement could constitute a restraint of trade in violation of California law. After a second round at the Ninth Circuit, the case has been reversed and remanded yet again, based on the panel majority's conclusion that the "no re-hire" provisions at issue were overbroad and unenforceable.

Golden I

Upon the termination of his employment with the California Emergency Physicians Medical Group ("CEP") in 2007, Dr. Donald Golden filed a racial discrimination claim against CEP in California state court. CEP removed to federal court and the parties orally agreed to settle. When the time came for Golden to sign the written settlement agreement, he refused, arguing that Paragraph 7 violated Section 16600 of the California Business & Professions Code. Section 16600 prohibits contracts "by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind."

The district court ordered Golden to sign the agreement, based on its finding that Paragraph 7 (containing the "no re-hire" provisions) permitted Golden to compete with CEP and was therefore not a restraint on his practice. Golden then filed his first appeal to the Ninth Circuit. The majority in Golden I held that the district court misconstrued the applicability of Section 16600. Relying on Section 16600's legislative history and California case law, the majority stated that Section 16600 applies "not only to noncompetition agreements but also to any contractual provision that places a 'restraint of substantial character' on a person's ability to practice a profession, trade, or business." Golden v. Cal. Emergency Physicians Med. Grp., 782 F.3d 1083, 1092 (9th Cir. 2015) ("Golden I").

For more details about the first district court opinion and appeal to the Ninth Circuit, click here.

Golden II

On remand, the district court found that Paragraph 7 was not a "restraint of substantial character" and again ordered Golden to sign the settlement agreement, prompting the instant appeal.

Reviewing de novo the validity of the settlement agreement, the panel majority reaffirmed the broad reading of Section 16600 reached in Golden I. Golden v. Cal. Emergency Physicians Med. Grp., 896 F.3d 1018, 1021 (9th Cir. 2018) ("Golden II"). Following a discussion of California cases dealing with Section 16600, the majority determined that a restraint is of a "substantial character" when the contractual provision "significantly or materially impedes a person's lawful profession, trade, or business." Golden II, 896 F.3d at 1024.

The Golden II panel majority separated Paragraph 7 into three restraints on Golden's ability to practice medicine: (1) Golden "shall not be entitled to work or be reinstated" at "any facility owned or managed by CEP"; (2) Golden is barred from working at "any CEP-contracted facility"; and (3) "if CEP contracts to provide services to, or acquires rights in" a facility where Golden is currently working, CEP "has the right to and will terminate" him from that employment "without any liability whatsoever."

Of these three restraints, the majority upheld only the first, as it "simply restates the obvious proposition that an employee does not have a general right to work for an employer without the employer's consent." Id. at 1024. Importantly, the majority noted that Golden had no right to work at "any" CEP facility to begin with under the terms of his partnership agreement; in order to work at a new site, Golden had to go through a separate hiring process each time.

The second and third provisions, however, affected not only Golden's current and future employment at sites owned and operated by CEP, but also at third-party facilities CEP contracted with, regardless of any relation to services performed by Golden. According to the majority, the second and third provisions impermissibly expanded the scope of the restraint on Golden's ability to practice medicine, especially in light of CEP's size and anticipated growth as a company.

In his dissent, Judge Milan Smith expressed a number of concerns, mainly that the majority opened the door to the use of similar arguments based on the speculation of future events to "finagle" out of settlement agreements. Id. at 1029 (citing Golden I, 782 F.3d at 1094 (Kozinski, J., dissenting)).

What is the "Golden Rule" for California Employers?

Although Golden offers no clear guidance as to the continued viability of "no re-hire" clauses in California settlement agreements, employers should approach "no re-hire" and other non-compete provisions with caution. It is also unclear how the standard established by the Ninth Circuit will be applied in California state courts, as the California Supreme Court has yet to weigh in on the Golden decisions. Close scrutiny of provisions limiting or prohibiting former employees from working at an employer's worksites should be expected, particularly where a clause applies beyond facilities owned and operated by the employer to partners and affiliates, or where the employer commands a substantial share of the relevant labor market.

Most of the discussion in Golden II surrounds CEP's attempt to prevent Golden from practicing any type of medicine at any facility where CEP has a contract or some amorphous "interest." Therefore, even post-Golden, more specific "no re-hire" provisions limited to sites owned and operated by the employer—akin to the first provision in Paragraph 7—are unlikely to constitute "substantial" restraints and are likely permissible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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