It’s Different for Employees in California

In California, with a few very narrow exceptions, any contract that restrains anyone from engaging in a lawful profession, trade or business of any kind is void.  Cal. Bus. & Prof. Code § 16600.  As a result, non-competition agreements with employees are typically unenforceable.  Earlier this week, the Ninth Circuit Court of Appeals looked at the issue of whether a “no-employment” provision in a settlement agreement between a doctor/employee and his former employer (a large consortium that manages and staffs hospitals, clinics and facilities) was an illegal restraint.  The “no-employment” provision barred the doctor from seeking employment with his former employer, as well as any facility owned, managed or contracted with his employer.  The provision also permitted the doctor to be terminated if the former employer acquired an ownership interest in, or began to manage, a facility where the doctor worked in the future.

The lower court found that the “no-employment” provision in the settlement agreement was not a covenant not to compete because it did not preclude the doctor from working for a competitor of his former employer or at another hospital or facility not operated by his former employer.  The Ninth Circuit disagreed.  The Court found that Section 16600 prohibits covenants not to compete as well as other contractual restraints on professional practice, and remanded the case to determine whether the “no employment” provision constituted “a restraint of substantial character on [the doctor’s’ medical practice.”

For employers with employees in California, this decision suggests that any provision in an employment agreement or settlement agreement that substantially restrains an employee’s ability to engage in their profession, trade, or business, will be subject to challenge.

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