Under California law, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (Bus. & Prof. Code §16600) The prohibition pertains even if the restraint is “reasonable” in duration and geographic scope, and therefore would be acceptable in most other states.1 The statute typically is invoked to invalidate non-compete provisions in employment agreements and in separation agreements.

In Golden v. California Emergency Physicians Medical Group, decided two weeks ago, the 9th Circuit Court of Appeals addressed the applicability of Section 16600 to a “no re-hire” provision in a settlement agreement. A no-rehire provision is common in the settlement of employment disputes, with the settling parties agreeing that the former employee is barred from working for the former employer. In Golden, the court took an expansive view of Section 16600 and held that the statutory restriction applies to any contractual provision that “‘restrain[s anyone] from engaging in a lawful profession, trade, or business of any kind’ —and thus, that the restriction extends to no re-hire provisions when “the restraint is ‘of a substantial character,’ no matter its form or scope.” 

Background & The Court’s Decision

After losing his staff membership, Dr. Donald Golden, a California emergency department physician, sued his former medical practice group for discrimination. Shortly before trial, the parties agreed to settle the lawsuit for a monetary sum, in exchange for Dr. Golden releasing his claims. The terms of the agreement were recited in open court before the district court judge, including that Dr. Golden waived all rights to future employment with the medical group or any facility it owned or with which it may contract in the future (i.e., a typical no-rehire provision). When the agreement was subsequently reduced to writing, Dr. Golden refused to sign it because it embodied this term. The district court ordered Dr. Golden to sign the settlement agreement; he refused and appealed.

The no-rehire provision at issue stated that: (i) Dr. Golden could not work at any facility where the medical group presently contracted, owned or managed; and (ii) if at a later date the medical group contracted with or acquired rights to a facility where Dr. Golden was already employed, the medical group would have the right to terminate his employment without consequence. Dr. Golden argued that because the provision might impermissibly restrain his professional practice in the future, it violated Section 16600. Because it was a material term, he contended that the entire settlement agreement was void and that his lawsuit should be reinstated.

A divided court agreed with Dr. Golden up to a point. Citing the wording of Section 16600, its statutory context, and California case law interpreting it, the court ruled that Section 16600 applies to any contractual limitation that operates as a restraint of “substantial character” on the ability to practice a vocation—including when the restraint is in a no-rehire settlement agreement context. The court did not rule that the no-rehire provision actually violated Section 16600, however. Instead, it remanded the case to the district court to conduct fact-finding on the issue of whether the provision actually would create a restraint of a “substantial character” on Dr. Golden’s pursuit of his profession.

Practical Advice

Whether a no-rehire provision is an actual “restraint of substantial character” depends on the practical scope and reach of the provision. For most employers, standard, tailored no re-hire provisions should not be deemed to be such a restraint.  Key factors include whether the prohibition is triggered by uncertain, future events – such as mergers or acquisitions affecting the employer.  Another key factor is whether the prohibition extends beyond the specific employer to subsidiaries and affiliates of the employer. Whether the employer commands a substantial share of the relevant labor market may also be a key factor.  The further the actual and potential prohibitions on employment extend, the more likely the provision may violate Section 16600.

Employers with California employees or contractors (regardless of where the employer has its headquarters) who include no-rehire provisions in settlement (or any) agreements should seek advice from California employment counsel regarding the inclusion and scope of such provisions, pending the ultimate resolution of Golden. 

1 Business & Professions Code sections 16601 and 16602 outline the limited statutory exceptions: non-competition agreements entered into in connection with the sale of a business or partnership interest, the sale of stock by a major shareholder in a corporation, and other such business-related transactions are enforceable.