Employment Settlement: What imposes a restraint of substantial character?

Golden v. CEP (9th Cir. 16-17354 7/24/18)

In 2000,Plaintiff, Dr. Golden, began working for, Defendant, CEP. CEP is responsible for staffing emergency rooms and medical facilities in California with physicians. In 2007, CEP terminated Dr. Golden’s employment on the grounds that he lacked board certification, but Dr. Golden felt that the real reason he had been fired was because of his race. Both parties agreed to settle this case, but when the settlement agreement was drafted, Plaintiff refused to sign the agreement because he claimed that one of the provisions, Paragraph 7, violated the California Business and Professional Code, Section 16600, which prohibits contracts “by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind”.

However, the district court ordered Plaintiff to sign the settlement agreement, claiming that the contract would not prevent Plaintiff from competing with Defendant because it did not restrain Plaintiff’s medical practice, so it did not violate section 16600. Plaintiff appealed this decision to the Ninth Circuit Court of Appeals. This court reversed the district courts order, saying that they misconstrued section 16600 because it applies not only to noncompetition agreements, but also to any contractual provisions, like that of Paragraph 7, that places a restraint of substantial character on a person’s ability to practice a profession, trade, or business. Ultimately, it comes down to whether Paragraph 7 restrained Plaintiff’s ability to practice medicine in California, given the large presence of CEP in California. The court of appeals concluded that Paragraph 7 does in fact violate section 16600 of the California Business and Professional Code.

The court of appeals concluded that a contractual provision imposes a restraint of substantial character if it significantly or materially impedes a person’s lawful possession of trade or business. The restraining effect must be significant enough that it would prohibit the policies of open competition and employee mobility laid out in section 16600. Paragraph 7 of the settlement agreement is restrictive in his ability to practice medicine in three ways:

  1. He will not be entitled to work or be reinstated at any facility owned or managed by CEP.

  2. He is barred from working at any CEP contracted facility.

  3. If CEP contracts to provide services to or acquires rights in a facility where Dr. Golden is currently working as an emergency room physician, CEP has the right to terminate him from that job.

While it is acknowledged by the court of appeals that number one does not substantially restrict Plaintiff, it is found that numbers two and three both substantially restrict Plaintiff and are therefore barred by section 16600. The court of appeals determined that this contractual provision, which is material to the settlement agreement, substantially restricts Plaintiff’s future employment at third party facilities, and therefore reverses the district courts order directing Plaintiff to sign the settlement agreement. The court of appeals also remands for further proceedings consistent with this opinion. 

Application: A party should not be directed to sign an agreement that violates the California Business and Professional Code section 16600 that will significantly restrict the parties ability to work in the future.