Alert - Employment Law Alert – Ninth Circuit Further Restricts "Non-Compete" Agreements

November 15, 2018
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Employers who negotiate severance packages with disgruntled or problem employees often include language in the severance agreement whereby the employee agrees to never again seek employment with the employer or with any entity affiliated with the employer.  This is a rational requirement that assists both employer and employee in moving on professionally, by mutually contracting to have no further dealings with one another.  A recent opinion by the Ninth Circuit Court of Appeals is therefore concerning because (1) it places an outer limit on the parties’ ability to contract to stay away from each other, and (2) it states that courts will view such agreements as posing “mixed questions of law and fact” which invites a higher level of judicial scrutiny and second guessing.  As a result of this decision, employers with California employees will have to take much greater care in the drafting of severance/termination agreements. The case is Golden v. Cal. Emergency Physicians Med. Grp., 896 F.3d 1018 (9th Cir. 2018) (“Golden”). 

The underlying facts of the case are fairly straightforward.  Dr. Golden commenced employment with Defendant California Emergency Physicians Medical Group (“CEP”) in 2000.  CEP terminated Dr. Golden in 2007, allegedly for poor performance and because he was not board certified.  Dr. Golden sued CEP alleging racial discrimination.  The parties reached a settlement of the lawsuit at a settlement conference presided over by a magistrate judge.

The issue arose when Dr. Golden refused to sign the written settlement agreement.  The written agreement included a provision stating that Dr. Golden would not be entitled to work at any CEP – owned medical facility, or at any facility to which CEP later acquired the rights.  The provision further stated that CEP would have the right to terminate Dr. Golden from his job at a facility if CEP contracted with, or acquired the rights to provide services to, the facility.  Dr. Golden asserted that this provision violated California Business and Professions Code section 16600, which prohibits contracts “by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” 

Dr. Golden’s attorney withdrew from representing him, and filed a motion to enforce the settlement agreement (the attorney’s fee was contingent on the settlement).  The District Court granted the motion, and ordered Dr. Golden to sign the settlement agreement, holding that the agreement did not violate B&PC 16600 because it did not prevent Dr. Golden from “competing” with CEP.  Dr. Golden appealed, and the Ninth Circuit vacated the District Court’s order, holding that 16600 is not limited to noncompetition agreements but also applies to any contractual provision that places a “restraint of a substantial character” on an individual’s ability to practice their profession, trade, or business.  The Court sent the case back to the District Court with instructions to determine whether the settlement agreement was “a restraint of substantial character to Dr. Golden’s medical practice.”

On remand, the District Court again ordered Dr. Golden to sign the settlement agreement, finding that the provision was not a substantial restraint.  Dr. Golden again refused to sign the agreement and appealed for a second time.  Ordinarily, appellate courts defer to a district court’s findings of fact, and will limit their review to legal issues.  In this case, however, the Ninth Circuit found the enforceability of the provision to be a “mixed question of law and fact.”  This meant that the Ninth Circuit could review both the District Court’s construction of the provision and the District Court’s conclusion that the provision did not violate 16600.    

The Court construed 16600 more broadly than the District Court did.  The Ninth Circuit held that a contractual provision “imposes a restraint of substantial character” if it “significantly or materially impedes a person’s lawful profession, trade or business.”  The Court warned that “it will be the rare contractual restraint whose effect is so insubstantial that it escapes scrutiny under section 16600.”  With respect to the settlement agreement, the Court took no issue with CEP preventing Dr. Golden from being reinstated at his prior worksites, or with Dr. Golden being prevented from working at any other facility that CEP owned or managed.  However, the Court held that the provisions giving CEP the right to terminate Dr. Golden from a job at any facility where CEP later acquired rights, even if Dr. Golden would not work for or with CEP, constituted a “substantial restraint” on Dr. Golden’s ability to seek or maintain employment with third parties.  On this basis, the Court invalidated the entire settlement agreement.

TAKEAWAY – over the last ten (10) years, dating back to Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, California courts have consistently eroded the rights of employers to place restraints on the ability of employees to practice their profession, trade and/or business post-employment.  Golden makes clear that the prohibition is not limited to non-compete covenants, but also applies to other “restraints” on employment. Employers still have the right to protect their trade secrets under the Uniform Trade Secrets Act, Civil Code § 3426 et al., and courts generally enforce provisions that seek to prevent employees from using proprietary information or trade secrets in subsequent employment.  As noted in Golden, provisions stating that an employee will not seek or obtain future employment with the employer are generally held valid.  Beyond these two situations, any provisions in an employment contract or a severance agreement that further limit an employee’s ability to seek employment elsewhere are likely to be invalidated by the courts.  [This does not, of course, apply to contracts for the sale of a business (including its goodwill) in which the seller agrees not to solicit the clientele of the business post-sale.]

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Authored by:
Horace W. Green
T:  (925) 944-9700
hgreen@bpbsllp.com

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