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Labor & Employment

How a No-Rehire Agreement Unraveled By David Rashé and Usama Kahf



ettlement agreements with employees often contain a “norehire” clause. Generally, it states that the employee waives the right to any future employment with the company, and the company cannot be held liable if it later rejects a job application from that individual. It is understandable that employers do not want to work with someone who previously sued them; not only has the trust between them eroded beyond repair, but there is legitimate concern that any person rehired after a lawsuit has been settled may feel untouchable and deflect any criticism or negative action with accusations of retaliation. But the legality of these types of provisions is an open question. Few court decisions have addressed the extent to which a no-rehire clause in a settlement agreement is enforceable, likely because most employees want nothing to do with the former employer they sued and are

unlikely to seek re-employment with the same company. But, recently, a federal appeals court held that an overly broad no-rehire provision in a settlement agreement can, in some cases, be an unlawful restraint of trade. In Golden v. California Emergency Physicians Medical Group, the Ninth Circuit Court of Appeals voided a settlement agreement between a physician and his former employer because one provision imposed a restraint of trade in violation of California’s strict prohibition on non-compete and related covenants. Business & Professions Code Section 16600 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.” Section 16600 applies to any “restraint of a substantial character,” not just those found in standard noncompetition agreements. Although there are certain limited exceptions to

this prohibition, none are applicable in Golden v. California Emergency Physicians. A physician worked for a partnership of doctors that formed a network of nearly 2,000 physicians across 11 states and in 160 medical facilities in California alone. After the physician was terminated, a legal dispute arose between him and the medical group. The parties came to an oral agreement to settle, but when the agreement was reduced to writing, the physician refused to sign due to what he considered to be a broad no-rehire provision. The provision provided that the physician (1) could not work or be reinstated at any facility owned or managed by the medical group; (2) could not work at any facility contracted by the medical group; and (3) could be terminated by the medical group if it ever came to provide services to, or acquire rights in, a facility in which the physician was currently working as an emergency room or hospital physician. The physician refused to sign the agreement, his attorney withdrew, intervened in the proceedings, and sought to enforce the agreement in order to collect the fee for his services. The district court ordered the physician to sign the agreement. The Ninth Circuit reversed on the ground that the district court improperly construed Section 16600. On remand, the district court once again ordered the physician to sign the agreement after finding that the no-rehire provision did not impose a “restraint of substantial character.” On appeal, the Ninth Circuit found that the provision at issue constituted a “restraint of substantial character” in two ways. First, it clarified that, for purposes of Section 16600, a restraint of trade is “substantial” if it “significantly or materially impedes a person’s lawful profession, trade, or business.” To reach this conclusion, the court took a cue from an early California Supreme Court decision, the 1916 case of Chamberlain v. Augus-

Today's General Counsel, Winter 2019