California Business & Professional Code Section 16600 applies to any professional restraint that substantially (significantly or materially) restrains a person’s lawful profession, trade, or business, the Ninth Circuit held, and under this standard, a provision in a settlement agreement between a doctor and his former employer violated Section 16600 to the extent it prevents him from working for employers that have contracts with his former employer and permits his former employer to terminate him from existing employment in facilities that are not owned by the former employer. Further, the court below abused its discretion in ordering the doctor to sign the agreement, said the appeals court, reversing the lower court’s decision. In a separate dissent, Judge Milan Smith—observing that “this dispute ceased being a typical employment dispute and metastasized into one of those cases that only Franz Kafka could love,”—argued that the majority’s conclusion was based primarily on a series of highly speculative future professional restraints that may or may not happen (Golden v. California Emergency Physicians Medical Group, July 24, 2018, Bates, J.).
The emergency-room doctor sued his former practice group, California Emergency Physicians Medical Group (CEP), which managed or staffed many emergency rooms in California and other western states, over the loss of his staff membership at a hospital. He alleged various federal and state causes of action, including race discrimination. Prior to the scheduled trial date, the parties orally agreed in open court to settle the case. In return for a substantial monetary amount, the doctor agreed to relinquish his suit, forego all other possible claims against the group, and, in Paragraph 7 of the agreement, waived all rights to employment with the group or any facility it owned or with which it may contract in the future.
Prior proceedings. The doctor, however, subsequently refused to execute the written agreement and attempted to have it set aside. His attorney then withdrew, intervened in the proceeding, and moved to enforce the agreement. The district court granted the motion and ordered the doctor to sign, reasoning that because Paragraph 7 would not prevent him from competing with his former employer, it was not a restraint on his medical practice, and Section 16600—which provides with certain exceptions 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”—did not apply.
On appeal, the Ninth Circuit in a prior opinion held that the lower court had misconstrued Section 16600. Because the record regarding whether Paragraph 7 substantially restrained the doctor’s practice of medicine was not fully developed, the appeals court remanded to the district court, which again ordered the doctor to sign the agreement, concluding that Paragraph 7 was not a restraint of a substantial character.
Restraint of a substantial character. Addressing the case for a second time, the Ninth Circuit turned to California state court decisions to determine what constitutes a “restraint of substantial character” under Section 16600. The California Supreme Court, the appeals court observed, has applied Section 16600 to invalidate a monetary penalty for engaging in competitive conduct, an agreement to forfeit retirement benefits, and a short-term promise not to compete or to solicit clients, and it has suggested that a stock option penalty or a promise not to solicit a small group of clients would fail under the statute. Although two state appeals court decisions have held that training reimbursement agreements are permissible under Section 16600, the Ninth Circuit noted that there were good reasons to treat that situation as unique.
In light of these authorities, the court found that a contractual provision imposes a restraint of a substantial character if it significantly or materially impedes a person’s lawful profession, trade, or business. Noting that California’s legislature has clearly expressed its disapproval of contracts that restrain lawful business and professional activities, the court stressed that “it will be the rare contractual restraint whose effect is so insubstantial that it escapes scrutiny under section 16600.”
Impedes ability to practice medicine. Next the court found that Paragraph 7 impeded the doctor’s ability to practice medicine in three ways. It provides that he “shall not be entitled to work or be reinstated” at “any facility owned or managed by CEP;” bars him from working at “any CEP-contracted facility;” and states that “if CEP contracts to provide services to, or acquires rights in” a facility where he is currently working as an ER physician or a hospitalist, CEP “has the right to and will terminate” him from that employment “without any liability whatsoever.”
Although the first provision prevented him from being reinstated to any of his prior CEP worksites, the court found its impediment to his medical practice was minimal. The remainder of the paragraph, however, affected not only his employment at CEP itself, but also his current and future employment at third-party facilities, said the court, finding that the second and third provisions substantially restrained his practice of medicine and were therefore barred by Section 16600.
This interference with the doctor’s ability to seek or maintain employment with third parties “easily rises to the level of substantial restraint,” the court reasoned, noting that CEP currently staffs 160 facilities in California and it handles between 25 and 30 percent of the state’s emergency room admissions.
And while CEP argued that Paragraph 7 does not impose a substantial restraint to the extent that it impedes the doctor’s ability to practice as an ER physician (because he testified that he no longer practices emergency medicine and that he had not applied for a position in that field since 2011), the court observed that he worked as an emergency room physician for three years before he was terminated by CEP and he testified at his deposition that he still works as a hospitalist. Thus, work as an emergency room physician and a hospitalist was included within his “profession” for purposes of section 16600. Further, Paragraph 7 not only restrained him from holding these positions, it would also prevent him from practicing any type of medicine at a facility where CEP has a contract.
Not speculative. Rejecting the dissent’s contention that its analysis was improperly based on speculation about events that may or may not occur should Paragraph 7 be allowed to take effect, the court noted that “Paragraph 7 is unequivocal: it states that [the doctor] ‘shall not be entitled to work’ at any facility where CEP has a contract, and that CEP ‘has the right to and will terminate’ [his] employment if it later contracts with a facility where he is working as a hospitalist or emergency room physician.” Far from being highly speculative, these future events were expressly contemplated by the language of the settlement agreement.
In sum, said the court, “the text of section 16600, the California courts’ interpretation of that text, and the statute’s underlying legislative policy together persuade us that the statute applies to any professional restraint that substantially—i.e., significantly or materially—restrains a person’s lawful profession, trade, or business.” Under this standard, Paragraph 7 survives to the extent that it barred the doctor from working at facilities owned or operated by CEP, but fails to the extent that it prevents him from working for employers that have contracts with CEP and to the extent that it permits CEP to terminate him from existing employment in facilities that are not owned by CEP. Because CEP did not argue that any exception to section 16600 applies, and because the parties did not dispute that Paragraph 7 was material to the settlement agreement, the court found the entire agreement was void.
Dissent. Judge Smith argued that the settlement agreement would not substantially restrain the doctor from engaging in his chosen profession as the only discernable limitation on his profession was that he could no longer work for CEP, which even the majority agreed did not violate Section 16600. Noting that the doctor has been employed continuously since this litigation began and he could not point to a single instance where Paragraph 7 would actually restrain his medical practice, Judge Smith contended that to hold that Paragraph 7 constitutes a restraint of a substantial character was impermissibly speculative and erroneous. “The majority’s opinion today limits employers and employees from entering into settlement agreements based on hypothetical scenarios that may or may not happen years down the road,” the judge argued.
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