Friday, April 17, 2015

The Golden Rule: Ninth Circuit Issues Odd, Unclear Opinion on No-Employment Clauses

My colleague Robert Milligan at Seyfarth Shaw predictably beat me to the punch in commenting on the Ninth Circuit's recent opinion in Golden v. Cal. Emergency Phys. Med. Group, which is embedded below. But at the risk of repeating his fine and thorough discussion of the case, it's potentially an important enough development for me to comment on as well.

The court held that a "no-employment" clause in a settlement agreement could constitute an invalid restraint of trade under Section 16600 of California's Business & Professions Code. No-employment clauses are neither unusual nor controversial, and they often appear in settlement agreements arising out of employment lawsuits.

Dr. Golden appeared to have settled an employment dispute with California Emergency Physicians Medical Group, which is apparently a large consortium of physicians that staffs ERs in California. As part of the settlement, Dr. Golden had to agree to a no-employment clause with CEP and any facility that CEP may own or with which it may contract in the future. It also gave CEP the right to terminate Dr. Golden from a facility if CEP acquired it in the future.

Dr. Golden, though, balked at signing the settlement agreement on account of the no-employment provision, arguing that it violated Section 16600 of the Code. Courts have interpreted that provision broadly, invalidating virtually all forms of employee covenants not to compete. However, the no-employment clause is not really a covenant not to compete. It arises in the context of a settlement, rather than as part of any hiring or other employment condition.

The Ninth Circuit sided with Dr. Golden and remanded the case back to the district court for fact-finding. Importantly, the court did not find that the no-employment clause was an impermissible restraint of trade under California law. Rather, it found the district court erred by categorically holding that it wasn't. Put simply, a "no-employment" clause can implicate Section 16600 and that section is not limited to a traditional non-compete. Therefore, a remand was necessary so the district could "conduct further fact-finding as it deems prudent."

That's where the case is a bit of an oddity (shocking for the Ninth Circuit). As the dissent points out, fact-finding over what, exactly? The agreement is what it is, and there was nothing immediately that impacted Dr. Golden's employment. So what are the pertinent facts?

Perhaps the court is saying that the trial judge must determine how significant a player CEP is in the regional ER staffing business and how its market power could affect Dr. Golden. If so, this starts to sound like a mini-antitrust trial in the context of an employment settlement. Lovely. Or maybe the trial judge will examine CEP's expansion strategy to see how big it could get. Without question, CEP will love to reveal those cards. Or should a labor economist testify about the potential future impact on Dr. Golden's ability to practice medicine and what opportunities he might have to forego? That seems more valid, but who pays for that? Does Dr. Golden's settlement cost him expert witness fees, all of a sudden? Ultimately, the case isn't clear, and there's little guidance for the district court on remand.

The impact of this case beyond the facts is unclear. In my opinion, lawyers may make more of this than they actually should. A typical no-hire clause in an employment settlement agreement will limit an employee's ability to work for that employer. It's unclear that many employees would want to contest that, and Dr. Golden is in somewhat of a unique position given the size and scope of the consortium he sued. Too, Dr. Golden and his lawyer appear to have had some sort of a falling out, and Dr. Golden held up the settlement on account of this provision. This doesn't happen all that often, so it's pretty likely that even if these clauses are unenforceable no employee is going to torpedo a settlement because of its inclusion.

Almost certainly, employers will want to add some representation or warranty in a no-hire clause from the employee that he does not believe the clause will constitute a restraint of substantial character on his trade or profession. That may help, but it's not failsafe. Or, employers could leave the clause out entirely and just not hire the person back. I don't see what's so wrong with that solution. Seems simple and less of a lawyer quandary.

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