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Are “No Rehire” Provisions in Settlement Agreements at Risk?

Posted in Breach of Fiduciary Duty/Duty of Loyalty, Covenants Not to Compete in California, Covenants Not to Compete in Other Jurisdictions, Hiring a Competitor’s Employees, Protecting Trade Secrets and Other Business Information, Unfair Competition

JK New picThe use of “No Rehire” Provisions in settlement agreements between employers and their former employees allow employers to protect themselves against “boomerang” lawsuits.  For instance, a former employee who claims he/she was terminated because of discrimination would be prevented from later submitting a new job application and then suing the employer again claiming he/she was not hired because of discrimination.  This common provision is basically an agreement by the employee that in exchange for consideration, usually the payment of a sum of money, he/she will dismiss their claims against the employer and will contractually agree not to seek to be rehired.  A recent decision from a panel of judges in the Ninth Circuit, however, has called the “No Rehire” provisions into question as possibly violating section 16600 of the Business and Professions Code.

In Golden v. California Emergency Physicians Medical Group, the plaintiff doctor sued after he lost emergency room privileges at one of CEPMG’s facilities.  Prior to trial, the plaintiff doctor agreed to settle his claim for the payment of a large sum of money and initially agreed (at least orally through counsel) not to seek employment with CEPMG again.  The “No Rehire” provision that was subsequently incorporated into a written settlement agreement provided that the plaintiff doctor would not seek re-employment with CEPMG and also provided CEPMG the right to terminate the plaintiff’s employment should he be working at any facility that it subsequently acquired.  (CEPMG is a large consortium that manages or staffs many emergency rooms, in-patient clinics and other facilities in California and other Western states and intends to continue expanding.)

After the plaintiff doctor refused to sign the written settlement agreement containing the “No Rehire” provision, his former counsel filed a motion to enforce the settlement agreement (apparently to obtain his contingency fee from the settlement proceeds).  The Distr
ict Court concluded that the “No Rehire” provision was not a “non-compete” provision and therefore did not run afoul of section 16600.  The Court ordered plaintiff to execute the written settlement agreement containing the “No Rehire” provision.

On appeal, a panel of the Ninth Circuit voted 2-1 to reverse the lower court and have it consider whether the “No Rehire” provision violated section 16600.  The Ninth Circuit concluded that the lower court was too focused as to whether or not the “No Rehire” provision was a “non-compete” rather than looking at the broader implications of section 16600 which prohibit any contract that restrains anyone “from engaging in a lawful profession, trade or business of any kind …”  In reaching its decision, the Ninth Circuit relied primarily on an old 1916 case involving an employment agreement that required an employee to pay the employer $5,000 if he joined a competitor.  The Ninth Circuit instructed the lower court to determine whether the “No Rehire” provision “constitutes a restraint of a substantial character” to plaintiff’s ability to practice medicine.

In his dissent, Circuit Judge Alex Kozinski criticized the opinion as going way beyond what California courts have done to interpret section 1600 prohibitions.  Judge Kozinski recognized that the plaintiff was “paid a large sum of money and in exchange he [was to give] up his right to continue working for CEPMG.”  He pointed out that had the parties not settled their dispute, one outcome was that plaintiff would still lose his right of employment at CEPMG and would not be compensated anything at all.  Judge Kozinski argued that should “No Rehire” provisions be prohibited between settling parties, “few employment disputes could ever be settled.”

Judge Kozinski also attacked the majority’s opinion that the issue was even ripe for adjudication.  His preference was that the settlement agreement should be enforced and if, in the future the plaintiff found himself working at a facility that was to be acquired by CEPMG and would then lose his job, at that point he could raise the issue of section 16600.

The Court’s decision in Golden could impact the way employers and their attorneys try to resolve employment disputes, especially if “No Rehire” provisions can no longer be used.  It is important to remember that this is a decision from the Ninth Circuit and is not directly binding authority on California state courts.  It remains to be seen whether the Ninth Circuit will reconsider this issue en banc.  It is also curious why the Ninth Circuit panel did not certify this question to the California Supreme Court for guidance rather than decide the matter as it did.

It could be that the Golden decision is subsequently criticized, reversed or that California state courts decline to follow it.  It could also be argued that the scope of this ruling may be limited to its facts, i.e., whether or not this plaintiff’s ability to find work in the future as an emergency room physician in light of the former employer’s growing presence in that field constituted a restrain on his ability to engage in his profession.  Nevertheless, employers and their attorneys should be mindful of the Golden decision in connection with the resolution of employment disputes and keep an eye on future developments in this area.