Calif. Employers Have Another Reason to Scrutinize Settlement Agreements

By Toni Vranjes May 27, 2015
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When settling employment disputes, California businesses would be advised to keep this phrase in mind: “restraint of a substantial character.”

That phrase was a key part of a recent ruling by the 9th U.S. Circuit Court of Appeals, in Golden v. California Emergency Physicians Medical Group. The case centered on the settlement agreement between emergency room physician Dr. Donald Golden and his employer. The issue at hand was whether the no-rehire provision in the agreement violated Section 16600 of the California Business and Professions Code.

In its ruling, the 9th Circuit panel held that Section 16600 extends beyond noncompete agreements to also include any contract that constitutes a restraint of a substantial character on an individual’s ability to practice a profession.

So beware: If a no-rehire clause is broad enough to significantly limit an individual’s career opportunities, there may be trouble ahead for the employer.

The Ruling

The legal case began in 2008, when Golden sued his employer, alleging racial discrimination and various other claims. The dispute arose from the loss of Golden’s staff membership at a Northern California medical facility.

The two sides agreed to settle the case–and the agreement included an extremely broad no-rehire clause. It not only barred Golden from working for the employer again, it also stated that if the employer later buys or contracts with a facility where Golden works, then it can terminate him without any liability.

Golden had entered into the agreement reluctantly, and he later tried to have it set aside, according to the ruling. Eventually, the district court ordered the enforcement of the settlement agreement, and it dismissed the case.

Golden appealed, claiming that the no-rehire provision violated Section 16600–which would void the entire settlement agreement. Under Section 16600, contracts that restrain someone from engaging in a lawful profession, trade or business are void.

The plaintiff was especially alarmed about the huge market share of the California Emergency Physicians Medical Group (CEP).

“Given CEP’s dominance of emergency medicine within the State and its aggressive plans to expand its geographical footprint, Golden asserts that the agreement, if enforced, will substantially limit his opportunities to practice,” the 9th Circuit panel stated in its ruling. “CEP not only will refuse to employ him, but also will ‘terminate’ him, ‘without any liability whatsoever,’ if it subsequently acquires an interest in a facility where he would be working.”

The panel added: “Dr. Golden argues that the settlement clearly restrains him in a meaningful way from practicing his medical specialty by forcing him pre-emptively to surrender a position he may obtain in the future if certain circumstances–completely outside his control–eventually come to pass.”

There’s been no ruling from the California Supreme Court specifically on whether Section 16600 applies only to noncompete agreements. So the 9th Circuit panel analyzed both the text of the California business code and various court rulings. The analysis showed that there should be a broad understanding of this section, the panel concluded.

For instance, the 9th Circuit said that the language of Section 16600 doesn’t specifically target noncompete agreements between employers and workers, and isn’t even limited to employment contracts. Rather, it voids any agreement that restrains the pursuit of a lawful profession, trade or business.

Regarding case law, the panel cited Edwards v. Arthur Andersen LLP as one example supporting a broad reading of Section 16600. Although the 2008 Edwards case dealt with the issue of noncompete agreements, the California Supreme Court emphasized the state’s “strong policy against restraints to professional practice,” according to the 9th Circuit.

The defendant contended that Section 16600 should be interpreted narrowly. Citing the City of Oakland v.Hasseycase, CEP contended that Section 16600 bars only noncompete agreements. The 9th Circuit disagreed with that analysis.

“In determining a contract’s validity under Section 16600, therefore, the court should direct its inquiry according to the actual statutory language: whether the challenged provision ‘restrain[s anyone] from engaging in a lawful profession, trade or business of any kind,’ ” said the 9th Circuit panel.

It added: “This prohibition extends to any ‘restraint of a substantial character,’ no matter its form or scope.”

The panel reversed the district court’s judgment, stating that there’s no reason to believe that Section 16600 simply prohibits noncompete agreements, and not also other contractual restraints on professional practice.

“We refrain, however, from addressing the ultimate merits of this question on the relatively undeveloped record that accompanies this appeal, leaving the district court at liberty to order additional briefing or to conduct further fact-finding as it deems prudent,” the ruling stated.

The matter was remanded to the district court, which must now evaluate whether the no-rehire provision does actually restrain the plaintiff's medical practice in a substantial way.

The Takeaway

Although there’s no exact definition of “restraint of a substantial character,” employment lawyers say that some general guidelines can help companies in these situations.

“I don’t think this case is a message to employers that they can’t have no-rehire clauses in settlement agreements with a plaintiff,” said Irvine attorney James McDonald, of Fisher & Phillips.

The scope of a no-rehire clause is a key consideration, according to lawyers. In general, the broader it is, the riskier it becomes.

In the Golden case, attorneys said the defendant’s enormous market share was a huge concern. The clause potentially could prevent the plaintiff from practicing as an emergency room physician in a large part of that geographic area, according to McDonald.

The no-rehire provision in the case was “awfully broad,” he observed. “That was what got the 9th Circuit’s attention.”

Until this area of law is clarified, McDonald said, companies should avoid clauses that would authorize an employer to fire a plaintiff without recourse, in the case of a plaintiff who is working for a new company that is then bought by the plaintiff’s former employer.

Also, until there’s clarity, McDonald recommended limiting the clause to the employing entity that settled the dispute with the employee.

James Nelson, a Sacramento attorney at Greenberg Traurig, emphasized: “You want to be careful that it’s not broader than what you need.”

At the other extreme, eliminating the no-rehire clause from a settlement agreement also could be risky.

“If we don’t have that clause in there, employees could try to come back and apply, and say they didn’t get the job because of retaliation,” said Los Angeles attorney Julia Trankiem, of Reed Smith.

With emotions running high from a dispute, such a clause can provide peace of mind for the company, according to Nelson. “You don’t want a brand-new dispute to start tomorrow,” he said.

No-rehire provisions also can protect employers in disputes with no litigation. These clauses can be included in severance agreements negotiated with an employee.

While waiting for clarity from future case law, employers should keep a key question in mind, Nelson said: Is the no-rehire restriction significant enough that it could truly impede the employee’s ability to find work in the future?

Nelson discussed a number of scenarios to highlight the varying degrees of potential impact. For instance, if an unskilled 18-year-old employee making minimum wage settles a lawsuit with his employer, a no re-hire clause probably won’t be a significant barrier to his future career.

However, if his employer is one of a small handful of employers hiring unskilled labor in the area, then the restriction could rise to the level of a substantial restraint, according to Nelson. In that scenario, the employer should consider all these factors to determine the best approach.

Additionally, a no-rehire clause might pose a problem in highly specialized and regulated technical fields, which have relatively few employers, Nelson said. He cited an underground storage-tank tester as an example of this kind of specialized occupation.

The overall message to employers: Scrutinize each of the clauses included in a settlement agreement to make sure none are too broad.

“You need to make sure it’s reasonable,” Trankiem said.

Toni Vranjes is a freelance business writer in San Pedro, Calif.

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