April 23, 2019

April 23, 2019

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April 22, 2019

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Ninth Circuit Further Limits Enforceability of Post-Employment Restrictions in California

Applying a broad reading to a California employment statute, the Ninth Circuit U.S. Court of Appeals issued a decision further limiting the permissibility of post-employment restrictive covenants in California. In Golden v. California Emergency Physicians Medical Group, 2015 WL 1543049 (9th Cir. April 8, 2015), the court held that the limitations on restrictive covenants imposed by the California Business & Professions Code section 16600 ("Section 16600") extend beyond non-compete covenants.

Dr. Donald Golden sued his former employer, California Emergency Physicians Medical Group ("CEP"), regarding the loss of his staff membership at one of CEP's many California medical facilities. The parties orally agreed to settle the case pursuant to an agreement under which, among other things, Dr. Golden would not work for CEP or any facility that CEP may own or contract with in the future (the "no-employment" provision). However, Dr. Golden refused to execute the written settlement agreement memorializing the terms of the oral agreement.

The district court enforced the settlement agreement, holding that the settlement agreement (including the no-employment provision) was valid and enforceable. The district court reasoned that Section 16600 did not invalidate the no-employment provision because, according to the district court, Section 16600 only applied to restraints of trade that involved a non-competition provision. In this case, the no-employment provision did not limit Dr. Golden's ability to practice his profession generally, or his right to seek employment with competitors of CEP. Instead, the no-employment provision specifically limited Dr. Golden’s ability to do business with CEP. The district court acknowledged that the no-employment clause impaired Dr. Golden's ability to practice medicine at a large number of facilities in California, but held that because it did not prohibit Dr. Golden from competing with CEP, Section 16600 did not void the settlement agreement.

On appeal, the Ninth Circuit considered the plain language of Section 16600, which voids "every contract" that restrains anyone "from engaging in a lawful profession, trade, or business." There is no mention of the word "compete" or "competition" that would suggest a limited application of the law to these circumstances. Although the California Supreme Court has not explicitly ruled on whether Section 16600 applies only to non-compete provisions, the Ninth Circuit determined that California's strong public policy against restraints on professional practice supports a broad construction of Section 16600.

Therefore, in light of the plain language of the statute, as well as the California legislature's creation of limited and narrow exceptions to the general rule, the Ninth Circuit found a clear legislative intent to construe Section 16600 broadly enough to cover the no-employment provision at issue. The Ninth Circuit remanded the case and instructed the district court to determine whether the no-employment provision constituted a "restraint of a substantial character" to Dr. Golden's medical practice, pursuant to the statutory language of Section 16600.

This case demonstrates an important expansion in the interpretation of employment contracts in California. The Ninth Circuit's holding could invalidate a vast array of contracts that restrain the ability to work without limiting the right to compete. In light of this case, employers should review the language used in current and future employment contracts and settlement agreements in California. 

© 2019 Schiff Hardin LLP

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Schiff Hardin represents management in labor matters and employment-related litigation, and provides counsel to employers with respect to all legal aspects of employer-employee relations. Our firm's labor law practice encompasses both the private sector and the public sector for large and small employers in a broad range of markets and industries. Our Labor and Employment Group works cooperatively with attorneys in our Employee Benefits and Executive Compensation Group to provide our clients with comprehensive assistance in every aspect of the employer-employee relationship.

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