Non-compete clause in California

Non-Compete Clause Singled Out by Ninth Circuit

A recent decision by the Ninth Circuit of the U.S. Court of Appeals has clarified the impact of specific non-compete clause provisions on the enforceability of employment settlement agreements. In Golden v. California Emergency Physicians Med. Grp., No. 16-17354 (9th Cir. July 24, 2018), the Court considered the effect of a “future employment” provision in a settlement agreement and determined that it constituted a “restraint of substantial character” such as to render the entire agreement void as against public policy.

Employment Termination Settlement

Dr. Donald Golden was terminated from employment by California Emergency Physicians Medical Group (CEP) in 2007. He lacked necessary medical board certification. Dr. Golden proceeded to sue CEP claiming that his termination was race-based. The two sides entered mediation and arrived at a settlement agreement.  The parties then reached an impasse in getting the settlement finalized as a result of the “future employment” provision in the agreement, which stated:

“The parties agree that . . . Golden shall not be entitled to work or be reinstated at any CEP-contracted facility or at any facility owned or managed by CEP. The parties further agree that if CEP contracts to provide services to, or acquires rights in, a facility that is an emergency room as defined and regulated by California law at which Golden is employed or rendering services, CEP has the right to and will terminate Golden from any work in the emergency room without any liability whatsoever.  Similarly, the parties agree that if CEP contracts to provide services to, or acquires rights in, a facility at which Golden is employed or rendering services as a hospitalist, CEP has the right to and will terminate Golden from any work as a hospitalist without any liability whatsoever.”

To Dr. Golden, this represented far more than a restriction on future employment with CEP. He felt that language restricted his ability to work in a much wider selection of companies who might “contract” with CEP, regardless of CEP’s ownership or management status. He contended that this violated the statute that governs non-compete agreements in California, Business & Professions Code 16600.

Non-Compete Clause Appealed to Ninth Circuit

Dr. Golden brought the issue twice to the Ninth Circuit after being ordered by the District Court to sign the agreement.  A divided panel found that to be prohibited under section 16600, “a provision need not completely prohibit the business or professional activity at issue, nor does it need to be sufficient to dissuade a reasonable person from engaging in that activity”.  The majority found that the non-compete clause in the settlement agreement had the effect of nullifying the entire agreement, rendering it unenforceable.

This decision highlights the problems with any sort of non-compete clause in a California agreement.  Non-compete clauses are not favored in California and employers should be extremely cautious about using such provisions in employment or termination agreements.  When such agreements are necessary they should be narrowly tailored to avoid the result in Golden.

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