“No future employment” provisions in settlement agreements

Are they still allowed in California?

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When an employment dispute is settled, the employer often makes the settlement contingent on the employee agreeing never to seek employment with the company again (and if currently employed by the company, to immediately resign). In one case, Golden v. California Emergency Physicians Medical Group, there was some disagreement among the federal courts as to the reasonableness of a provision regarding a former employee’s future employment prospects.

An emergency room doctor agreed to settle a lawsuit he had filed against California Emergency Physician’s Medical Group, which handles between 25-30% of the state’s emergency room admissions and which had been steadily growing over the preceding decade. The medical group also staffs 160 facilities in the state. Notwithstanding the employer’s broad reach, it insisted on including a provision in the settlement agreement that provided that the medical group had the right to and would terminate the former employee’s future employment as an emergency room physician or a hospitalist at any facility where the employer “later contracts or ‘acquires rights.’” The doctor refused to sign a written settlement agreement containing this provision, arguing that it violated California law.

California Business and Professions Code section 16600 provides that, “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The district court found that the settlement agreement provision did not conflict with this law, stating that this law only applied to noncompetition agreements. However, the Ninth Circuit Court of Appeals held that section 16600’s application should be expanded to other contractual restraints “of a substantial character” on a person’s ability to practice a profession, trade or business, and it instructed the district court to reevaluate the facts in light of this finding.

The district court found that the settlement agreement provision did not substantially restrain the doctor’s practice, and it ordered the doctor to sign the agreement; the doctor again appealed. The Ninth Circuit found the entire provision to be void and concluded that the district court abused its discretion in ordering the doctor to sign it. Specifically, the court found it unreasonably restrained the doctor’s ability to practice by (1) interfering with his ability to seek or maintain employment with third parties (i.e., facilities that contract with the medical group), and (2) allowing the medical group to terminate the doctor “from existing employment in facilities that are not owed” by the medical group.

The public policy underlying the court’s decision makes sense. An employee who files a lawsuit should not be forced out of a profession (or risk being terminated from future jobs within the profession) simply because his employer has extensive contacts with third parties and/or decides to later expand its business. Though future decisions by California state courts may impose further restrictions on employers, the Ninth Circuit’s interpretation of California law is not unduly restrictive. The Court’s decision does not prohibit employers from conditioning a settlement agreement on an employee’s resignation from the company or on an employee’s agreement not to seek future employment with the company, provided that such a condition does not somehow restrain the employee’s future practice in the same field. Nonetheless, employers – especially larger employers or those with a large market share in a geographic region – should be prudent when drafting “no future employment” provisions of settlement agreements with current and former employees.