When a former employee and an employer agree to settle the former employee’s lawsuit against the employer, the settlement agreement will frequently include a clause which provides that the former employee may not reapply for employment with the employer and the employer will not rehire the former employee. Such clauses are meant to protect the employer from a subsequent lawsuit if the employee were to reapply and be rejected by the employer. The Ninth Circuit, however, recently cast doubt on whether such clauses are permissible in California.

California law provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Cal. Bus. & Prof. Code § 16600. It is one of the most restrictive laws against covenants not to compete in the United States, and courts had traditionally applied the law to void agreements between employers and employees which would limit the employees’ ability to secure future employment competing with the employer. In Golden v. California Emergency Physicians Medical Group, --- F.3d --- (9th Cir. 2015), the Ninth Circuit opined that the law extends further. In Golden, the plaintiff and his former employer entered into a settlement agreement which provided that the plaintiff waived any and all rights to future employment with the former employer or employment with any facility the former employer owned or contracted with (the “No Reemployment Provision”). The plaintiff later had misgivings about the settlement agreement and refused to sign it. 

The former employer asked the District Court to enforce the settlement agreement and require the plaintiff to sign it. In response, the plaintiff argued, among other things, that the agreement was void because the No Reemployment Provision violated Section 16600. The District Court disagreed, finding that the No Reemployment Provision was not a covenant not to compete and was therefore not void under Section 16600.

On appeal, the Ninth Circuit disagreed with the District Court. The Ninth Circuit stated that the District Court had construed Section 16600 too narrowly. Section 16600 does not just void covenants not to compete, the Ninth Circuit held, but it also voids any agreement which imposes a restraint of substantial character on an individual’s ability to practice his or her trade or profession. Because the No Reemployment Provision could impose a substantial restraint on the plaintiff’s ability to secure future employment, the Ninth Circuit opined that the Provision may violate Section 16600.

The Ninth Circuit did not ultimately rule on whether the No Reemployment Provision in the settlement agreement actually did violate Section 16600. It instead remanded the case to the District Court for further proceedings on the issue of whether the No Reemployment Provision imposes a substantial restraint on the plaintiff’s ability to practice his profession.

In the future, employers entering into settlement agreements with former employees in California will need to carefully craft their no future reemployment clauses to ensure that they do not run afoul of Section 16600. While the Ninth Circuit in Golden did not suggest that all clauses barring future reemployment are impermissible, it made clear that such clauses will fall within the ambit of Section 16600 if they are too broad.