Decision: In Golden v. California Emergency Physicians Medical Group, the Ninth Circuit Court of Appeals held that a no-rehire clause in a settlement agreement violated California’s broad prohibition on restrictive covenants (Business & Professions Code section 16600). InGolden, an emergency room physician sued a consortium of E.R. physicians after losing his staff membership at a hospital, and the parties ultimately agreed to settle. The agreement had a no-rehire provision so the physician refused to sign it and asked the district court to set it aside, arguing that the no-rehire provision violated section 16600 because it restrained him from the lawful practice of his profession. The court denied the physician’s motion, finding the statute inapplicable because the provision at issue was not a covenant not to compete.

The Ninth Circuit reversed and remanded the case to the trial court to decide if the restraint was “substantial.” The court concluded that the settlement agreement was a contract restraining the plaintiff from engaging in a lawful profession, trade or business, in violation of section 16600. Judge Kozinski dissented, opining not only that the clause was permissible, but that it should be challenged at the time it was actually used for improper purposes, not before.

Impact: Although the law on this subject is still evolving, employers should consider the risk of no-rehire clauses in California being invalidated when structuring settlement agreements with former employees.