California employers have long been aware that California state law prohibits inclusion of non-compete clauses in standard employment agreements.  But, in a first of its kind case, a divided federal appeals court panel has interpreted California Business and Professions Code Section 16600 to also bar “no-employment” contract terms that prevent a former employee from working for the former employer or any entity in contract with the former employer.  The court held that this type of provision limits an employee’s ability to work in contravention of the terms of Section 16600.

In Golden v. California Emergency Physicians Medical Group, et al., a majority opinion from the Ninth Circuit Court of Appeals (which covers California) reasoned that Section 16600 is not limited solely to traditional non-compete agreements but instead covers any employment agreement that restrains people from engaging in a lawful profession, trade or business.  At issue in the case was a settlement agreement between an emergency room physician and his former employer that contained a provision that waived the doctor’s rights to employment with the medical practice or at any facility that the practice may own or with which it may contract in the future.  When the doctor refused to execute the written agreement, his attorney sought to enforce the agreement against him and the trial court held that Business and Professions Code § 16600 did not void the settlement agreement as it did not inhibit the doctor from competing with his former employer.

On appeal, the doctor argued that Section 16600 voids the agreement because the no-employment provision may impermissibly restrain his professional practice.  The dissent did not agree with that position, noting that such a possibility was at best hypothetical and did not limit his current ability to practice his profession.  However, the majority ruled that Section 16600 does not limit itself to non-compete clauses and may apply to this case.  In doing so, the court noted that Section 16600 does not use the word “competition” and is written in a very broad manner that contrasts with the later sections that detail specific exemptions to the rule.  The court declined to determine whether the contract was actually void; instead, it sent the case back to the trial court for additional fact-finding to determine whether the contract term created a substantial restraint on his professional practice.

California employers who include no-employment provisions in their severance or settlement agreements with former employees should take caution when including such terms and tailor them carefully to avoid challenge under Section 16600.  Provisions that allow an employer to terminate employment if a former employee is found to later be employed by a contractor or a company acquired by the employer may be deemed overly restrictive based on this ruling and may result in a void agreement.  That is a significantly dangerous result, as other rights created by the agreement regarding the former employee could also be lost to the employer.