The Ninth Circuit Court of Appeals recently broadened California's already expansive interest in promoting employee mobility by voiding any contract provision imposing a meaningful obstacle to a California resident's ability to work.
Executive Summary: The Ninth Circuit Court of Appeals recently broadened California's already expansive interest in promoting employee mobility by voiding any contract provision imposing a meaningful obstacle to a California resident's ability to work. The appellate court's decision calls into question the continued validity of post-employment restrictive covenants commonly included in severance packages and settlement agreements.
Unlike nearly every other state, California law—known as Business & Professions Code section 16600—generally prohibits parties from entering agreements that may pose a restraint on a person's trade, profession, or business. This prohibition had been limited to non-compete agreements often found in employment contracts. In Golden v. California Emergency Physicians Medical Group (9th Cir. 2015), however, a split Ninth Circuit concluded that California's non-compete prohibition can apply to any agreement potentially restricting a person's ability to work.
In this case, Golden sued his former employer for race discrimination. Following contentious litigation, the parties entered into a verbal agreement before trial to settle the matter, provided that Golden agreed not to apply to or be employed at any facility that his former employer owned or may own or contract with in the future. Golden had buyer's remorse, however, and refused to sign the written memorialization of the verbal agreement. His attorney then moved to enforce the parties' settlement agreement and Golden opposed, arguing that the agreement's "no-hire" provision was invalid under California law. The district court observed that the agreement made it difficult for Golden to practice medicine, but upheld the settlement agreement because California's non-compete prohibition did not apply to "no-hire" provisions that only limit an individual's specific ability to do business with his former employer, not his general ability to work in his chosen profession.
In reversing the lower court's decision, the appellate court determined that nothing within Section 16600 limits its application to non-compete covenants. Rather, the statute applies to any agreement imposing a restraint on an individual's professional practice, trade, or business. This follows decisions from California's Supreme Court confirming Section 16600's broad scope and control over any agreement posing "a restraint of a substantial character" on a former employee's ability to work.
Employers' Bottom Line: Golden offers two important takeaways for employers. First is the appellate court's expansion of California's prohibition of restrictive covenants beyond employment contracts to include virtually any agreement that could be a restraint on an individual's profession, trade, or business. The court clarified that California law "does not even implicitly constrain itself to contracts concerning employment." Second is the court's vague reference to restraints of a "substantial character" that are also voidable under Section 16600. Though the court provided no explicit guidance, it suggests that a key issue going forward is the practical impact the proposed restraint could have on an individual employee. A limitation could be unlawful under Section 16600 if the restraint imposes a meaningful obstacle to the employee's future mobility.
Ultimately, Golden calls into question both the presumed validity of "no-hire" clauses in severance and settlement agreements and an array of employment-related provisions commonly utilized by companies, including tuition/fee reimbursement clauses, claw-back provisions, and other provisions designed to discourage early separation. Employers should consider re-examining any contracts or agreements they may have with California employees to ensure their continued enforceability.
If you have any questions regarding this decision or other issues relating to trade secrets or noncompetition laws, please feel free to contact the authors of this Alert, Mark Saloman, firstname.lastname@example.org, a partner in our Berkeley Heights, New Jersey office and co-chair of FordHarrison's Unfair Competition practice group, David Cheng, email@example.com, a senior associate in our Los Angeles office, or Alexandria Witte, firstname.lastname@example.org, an associate in our Los Angeles office. You may also contact the FordHarrison attorney with whom you usually work.