342 | 2023 Cal-Peculiarities ©2023 Seyfarth Shaw LLP www.seyfarth.com The case involved unusual facts, arising in an usual procedural posture. The plaintiff was an emergency medicine physician who sued for unlawful termination of his staff privileges at a medical facility. The parties negotiated a settlement agreement that contained a no-rehire clause but then the plaintiff sought to renege on the basis that the no-rehire clause was contrary to public policy as expressed in section 16600. The district court rejected this concern, reasoning that section 16600 addresses only “covenants not to compete.” But the Ninth Circuit disagreed, holding that the no-rehire clause might constitute a substantial restraint of trade, depending on whether the former employer so dominated emergency medicine in California that the no-rehire clause could effectively constrain the plaintiff’s freedom to practice medicine.31 The Ninth Circuit declined to rule on the merits, remanding the case for further factual development. On remand, the district court again found that the “no rehire” provision was not a restraint of a substantial character, and ordered enforcement of the agreement. The plaintiff appealed, and the Ninth Circuit reversed.32 Reasoning 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,” the Ninth Circuit held that the provision at issue— forbidding the plaintiff from working at “any [defendant]-contracted facility”—went too far, considering the defendant’s large footprint in the relevant market.33 Thus, “no re-hire” provisions of the sort traditionally found in settlement agreements must be drafted carefully to avoid imposing any substantial restraint on the former employee’s profession, trade, or business. Moreover, as of 2020, the California Legislature has banned virtually all “no rehire” clauses in settlement agreements. Subject to certain specified exceptions, no settlement agreement may restrict a settling “aggrieved person” from obtaining employment with the employer against which that person has filed a claim, or with the employer’s parent company, subsidiary, division, affiliate, or contractor. The exceptions are these: (1) The parties may agree to end a current employment relationship. (2) A “no rehire” clause is permissible if the employer has determined, in good faith, that the settling party engaged in sexual harassment or sexual assault. Further, of course, an employer retains its right to deny employment to current employees and job applicants whenever “there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person.”34 Legislation in 2020 modified the second exception (where the settling party engaged in certain misconduct). Under this new law, the employer invoking this exception must have documented its determination of sexual assault or sexual harassment before the settling party filed a claim against the employer. While this new provision narrowed the second exception, another new provision expanded the exception to include “any criminal conduct”—not just sexual harassment or sexual assault.35 12.4 Permissible Contractual Restrictions Section 16600, while broad, is not unlimited. Certain contractual restrictions, while arguably within some unthoughtful notion of a “restraint of trade,” are nonetheless enforceable. 12.4.1 Duty of loyalty existing during employment During employment, employers, even in California, are entitled to their employees’ undivided loyalty. This principle was put to the test in a 2020 Court of Appeal decision, which rejected the argument that an employee’s promise to his employer not to form a separate, competing company was somehow unenforceable as against California public policy. The Court of Appeal thus affirmed a ruling in favor of Techno Lite, Inc., against former employees found liable for intentional interference with contractual relations, intentional interference with prospective economic advantage, fraud, and unfair competition.
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