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Outlining the Parameters of a Contractual Restraint on Trade: Golden v. CEP (9th Cir.)
As we have written previously on this blog, California law does not allow noncompete or other types of agreements that prohibit or unduly interfere with a person’s ability to work in his or her trade or profession. These noncompete agreements are generally called “restraints on trade” and cannot be enforced pursuant to Cal. Bus. & Prof. Code, § 16600 which provides that “… every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”
A recent decision here in California from the US Court of Appeals in San Francisco provides a nice example of the parameters of what is allowable and not allowable with respect to a contract that arguably constitutes a restraint on trade. See Golden v. California Emergency Phy. Med. Group, Case No. 16-17354 (US Court of Appeals 9th Cir. July 24, 2018).
In that case, the employee at issue was a medical doctor, Donald Golden (“Golden”). Golden began working for the California Emergency Physicians Medical Group (“CEP”) in 2000, but was fired in 2007. Golden sued CEP claiming that he was terminated because of his race. The litigation was settled and a settlement agreement was drafted. However, Dr. Golden objected to language in the settlement agreement that he believed violated California’s prohibition on restraints on trade. The federal trial court disagreed and ordered Dr. Golden to sign the settlement agreement.
This issue has now reached the Court of Appeals for the second time. The first time, the Court of Appeals held that §16600 was not limited to traditional covenants not to compete between employees and their employers. The court noted that the text of §16600 does not mention the “compete” or “competition” and does not even limit itself to contracts concerning employment. Rather, §16600 voids “every contract” that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.” As such, the court concluded that §16600 was applicable to a settlement agreement. However, the court was narrow in its ruling and sent the case back to the trial court for a determination about whether the Dr. Golden settlement agreement was, in fact, a restraint on trade. See Golden v. Cal. Emergency Physicians Med. Grp., 782 F.3d 1083 (US Court of Appeals 9th Cir. 2015).
When the trial court received the case back from the Court of Appeals, it ruled that the settlement agreement was NOT a restraint on trade and again ordered Dr. Golden to sign it. Again, Dr. Golden disagreed, refused to sign the settlement agreement and appealed. Once again, Dr. Golden won his appeal. The Court of Appeals ruled that the settlement agreement could not be enforced under §16600.
Here is the court’s reasoning. The contractual provisions were in two paragraphs of the settlement agreement. The first paragraph related to Dr. Golden’s ability to work specifically for CEP, the employer who fired him. The Court of Appeals held these provisions to be “okay” since preventing Dr. Golden from working at CEP was only a “minimal” impediment to his ability to work as a doctor, and is consistent with the “obvious proposition” that an employee does not have a general right to work for an employer without the employer’s consent
However, paragraph two of the noncompete section went further and prohibited Dr. Golden from working at third-party facilities including “any CEP-contracted facility.” As the court interpreted that language, under this provision, Dr. Golden could not work for a hospital, for example, that had a contract of any sort with CEP. The section went even further and barred Dr. Golden from working at any facility where CEP later contracts or “acquires rights” in the future.
In the court’s view, these provisions “easily” rose to the level of “substantial” restraints on Dr. Golden’s ability to obtain and retain future employment. As such, the court held the settlement agreement to be in violation of Cal. Bus. & Prof. Code, § 16600.
Contact San Diego Corporate Law
For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to help draft and implement employment agreements and all other types of business contracts including noncompete agreements that are enforceable. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Contact Mr. Leonard via email or by calling (858) 483-9200.
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