When no-rehire clauses go too far

Most successful employment mediations result in a written settlement agreement with standard and customary terms. One such term, a "no-rehire" provision, is almost always requested by counsel for the employer. It precludes the former employee from seeking reinstatement or re-employment with the employer. However, a recent (and divided) 9th U.S. Circuit Court of Appeals opinion invalidated the entire settlement agreement because its no-rehire provision went too far in restricting the plaintiff's right to pursue his lawful profession, trade or business, and provides a cautionary tale to counsel drafting such clauses. Golden v. California Emergency Physicians Medical Group, 2018 DJDAR 7211 (9th Cir. July 24, 2018).

The Golden Case

Dr. Donald Golden worked as an emergency room physician for California Emergency Physicians Medical Group (CEP). After his employment was terminated, he brought an action in state court alleging racial discrimination. CEP removed the case to federal court. The parties reached an oral agreement at a settlement conference before a magistrate judge. The settlement agreement was later reduced to writing that included a no-rehire provision. The restriction (Paragraph 7) provided that Golden would not work nor be reinstated at any "CEP-contracted facility or at any facility owned or managed by CEP." In addition, "if CEP contracts to provide services to, or acquires rights in, a facility that is an emergency room ... 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."

At that point, according to the dissent, the case "metastasized" from a typical employment case to "one that only Franz Kafka could love." The case's tortured procedural history, including two published 9th Circuit opinions, began when Golden refused to sign the settlement agreement, claiming that Paragraph 7 was contrary to California's statutory prohibition on contracts "by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind." Cal. Bus. & Prof. Code Section 16600.

After Golden refused to sign the settlement agreement, his attorney withdrew and then moved to intervene and enforce the settlement to collect his attorney fees. The district court granted the motion and ordered Golden to sign the agreement reasoning that because Paragraph 7 would not prevent Golden from competing with CEP, it was not a restraint on his medical practice, and Section 16600 did not apply.

Golden appealed. A divided panel in the first appeal reversed the district court's order, holding that the trial court had misconstrued Section 16600. The statute applies not only to noncompetition agreements but also to any contractual provision that places a "restraint of a substantial character" on a person's ability to practice a profession, trade, or business. See Golden v. California Emergency Physicians Medical Group, 782 F.3d 1083 (9th Cir. 2015).

The case was remanded to the district court to determine in the first instance whether Paragraph 7 "constitutes a restraint of a substantial character to Golden's medical practice." On remand, the district court again ordered Golden to sign the settlement agreement, concluding this time that Paragraph 7 was not a restraint of a substantial character. The court also denied Golden's request for a jury trial and ruled that an evidentiary hearing was unnecessary. Golden pursued his second appeal, challenging both the district court's order directing him to sign the agreement and its decision not to hold an evidentiary hearing.

A divided panel again reversed and remanded the district court's order directing Golden to sign the settlement agreement. The text of Section 16600 makes clear that California law prohibits any restraint "by which anyone" is precluded from engaging in "a lawful profession, trade or business of any kind." (Emphasis added.) Section 16600's underlying legislative policy, and the case law interpreting it, leads to the inexorable conclusion that the statute applies to any substantial ("significant or material") restraint on a person's lawful profession, trade or business.

Applied to Golden, Paragraph 7 was permissible to the extent that it prevented him from working at facilities that were presently owned or operated by CEP. But it became impermissible to the extent it prevented him from working for employers that have contracts with CEP, and to the extent that it permitted CEP to terminate him from existing employment in facilities that were not owned by CEP. This restriction was significant and material because it would allow CEP to terminate Golden upon acquiring an ownership interest in, or even entering into a contract with, a health care provider that then employed Golden, even if he worked as a hospitalist in another department, separate and apart from the emergency room. And to do so "without any liability whatsoever." Because Paragraph 7 was material to the settlement agreement, the entire agreement was void and the district court abused its discretion in ordering Golden to sign it.

The Dissent

Dissenting, Judge Milan Smith wrote that the settlement agreement did not violate Section 16600 because whether CEP will acquire an ownership interest in, or provide contractual services to, a medical facility at which Golden may be working at some point in the future was too speculative to constitute a substantial restraint on Golden's right to practice medicine. The district court made that factual finding based upon the evidence before it, and faithfully followed California law when it granted the motion to enforce the settlement agreement.

Analysis

The opinion raises questions regarding the scope of no-rehire provisions commonly used in employment settlement agreements. Employers typically wish to prevent former employees from seeking re-employment and make such a restriction a condition of the settlement. Here, the restriction placed on Golden was enforceable to the extent it prevented him from seeking re-employment at facilities presently owned or operated by CEP. The problem was with the broader restrictions on employment with employers that had contracts with CEP. In addition, Paragraph 7 applied to facilities that CEP may in the future contract to provide services to, or acquires rights in, thereby constituting a significant restraint on Golden's right to practice medicine under the Golden holding.

Conclusion

The Golden decision suggests no-rehire provisions will be enforceable to the extent they are limited in scope to restrict employment from entities currently owned and operated by the employer. Conversely, the more the no-rehire provision prevents a former employee from engaging in a lawful profession, trade, or business with an entity not currently owned or affiliated with the former employer, the less likely a court is to uphold the restriction and enforce the settlement agreement.

If the restriction goes too far, the effort to prevent re-employment may backfire and render the entire settlement agreement unenforceable. Not only defense counsel have an interest in correctly drafting a no-rehire provision. Plaintiff's counsel will also want to ensure the settlement's enforceability.

After all, it was Golden's own counsel who withdrew from representation, and then moved to enforce the settlement, an unsuccessful endeavor because the no-rehire provision was too broad. As the dissent observed, Golden "refused to sign the settlement document, which he knew stiffed his lawyer out of the contingency fee he had earned for representing Dr. Golden for three years."

In short, the holding in Golden is a stark reminder to both plaintiff and defense counsel that "less may be more" when drafting no-rehire provisions.