On April 13, 2015 we blogged about the decision of the Ninth Circuit in Golden v. California Emergency Physicians Medical Group, 782 F.3d 1083 (9th Cir. 2015). There, the Ninth Circuit considered whether, under California law, an employee could be ordered to sign a settlement agreement that included language that restricted him, inter alia, from future employment with his former employer.

Dr. Golden is an emergency-room doctor who sued California Emergency Physicians Medical Group (“CEP”), among others, regarding his loss of staff membership at a medical facility.  His lawsuit was based on various state and federal causes of action, including racial discrimination.  The parties orally agreed in open court to settle the case and the settlement terms included “a substantial monetary amount,”  dismissal of the action, a release of CEP and a waiver of any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future (the “no-employment provision”).  Dr. Golden refused to sign the written agreement and attempted to have it set aside.  His attorney moved the court to withdraw as counsel, moved the court to intervene and further moved the court to enforce the settlement agreement so he could collect his contingency fee. In further proceedings, a magistrate judge recommended that Dr. Golden be ordered to sign an amended agreement, and that recommendation was adopted by the district court judge who concluded the settlement agreement was not within the ambit of Business and Professions Code § 16600, which makes unlawful in California (with limited exceptions) any contract to the extent it restrains someone from engaging in a lawful trade, business or profession.  Dr. Golden refused to sign the agreement and filed a notice of appeal.

On appeal, the Ninth Circuit Court of Appeals reversed the district court’s enforcement of the settlement agreement and remanded the case to the district court to determine whether a no employment provision in the agreement is a “restraint of substantial character” to the Plaintiff’s medical practice.

On remand, the district court again ordered Dr. Golden to sign the settlement agreement, concluding that the no-employment provision was not a restraint of substantial character. Dr. Golden again appealed.

In its July 24, 2018 decision, the Ninth Circuit surveyed California law and noted first that a contractual provision imposes a restraint of substantial character if it significantly or materially impedes a person’s lawful profession, trade, or business.  The Ninth Circuit noted that a provision need not completely prohibit the business or professional activity at issue, nor need it be sufficient to dissuade a reasonable person from engaging in that activity.  Rather, the “restraining effect must be significant enough that its enforcement would implicate the policies of open competition and employee mobility that animate Section 16600.”  The Court noted that it “will be the rare contractual restraint whose effect is so insubstantial that it escapes scrutiny under Section 16600.”

Looking to the provision in the settlement agreement at issue, the Ninth Circuit noted that it impeded Dr. Golden’s ability to practice medicine in three ways.

First, the settlement agreement prohibited Dr. Golden from working or being reinstated at any facility owned or managed by CEP.

Second, the settlement agreement prohibited Dr. Golden from working at any CEP-contracted facility.

Third, the settlement agreement provided that if CEP contracts to provide services to, or acquires rights in a facility where Dr. Golden is currently working as an emergency room physician or hospitalist, CEP has the right to terminate his employment with no liability.

The Ninth Circuit held that the first provision, which barred Dr. Golden from future employment at facilities owned or managed by CEP did not impose a substantial restraint on his medical practice. The Ninth Circuit further held, however that the second and third provisions did substantially restrain Dr. Golden’s practice of medicine and were therefore barred by Section 16600.  These two provisions limited employment with third parties based merely on whether CEP contracted with them. As a result, if Dr. Golden was employed by a hospital that later contracted with CEP to provide, for example, anesthesiology services, Dr. Golden would be ineligible for employment with the hospital.

Given the size of CEP’s business in California—it staffs 160 facilities in the state and handles between 25% and 30% of the state’s emergency room admissions, these provisions were a substantial restraint on Dr. Golden’s trade.

The Ninth Circuit’s ruling may leave open whether a provision in a settlement agreement that permits an employer to terminate the employment of an employee where it acquires the employee’s new employer will pass muster under Section 16600.  The provisions at issue in Golden were extremely broad: Plaintiff was prohibited from employment with entities with which CEP contracts to provide services to, or “acquires rights” in.  A different, more limited provision that prohibited employment at entities as to which the employer acquires outright may be held not to impose a substantial restraint on trade.  Further, the Ninth Circuit relied in part on CEP’s broad reach in the state of California.  This leaves open that smaller employers may be able to impose restrictions that larger employers with more market share may not.

The potential antitrust impact of no-hire agreements between competitors has been a hot topic over the last few years, particularly in the high-tech industry where competition for the most talented programmers, developers and engineers is intense. An antitrust class action pending in the US District Court for the Northern District of California against six high tech firms — Intuit, Apple, Google, Intel, Intuit and Pixar – illustrates just how high the stakes can be when a no-hire agreement among competitors is challenged under federal and state antitrust laws. The plaintiffs in that putative class action are five software engineers who claim that the defendants entered into a series of no-hire agreements between 2005 through 2009 that eliminated competition for labor, artificially reduced compensation and job mobility and cost employees to suffer hundreds of millions of dollars in lost wages. That class action stems from a similar antitrust action brought by the DOJ in 2010 against the same six firms, which asserted that the defendants violated Section 1 of the Sherman Act by agreeing that they would not cold-call each other’s employees. Although the DOJ’s antitrust action against Google, et al. settled shortly after it was filed, the class action challenge to the alleged no-hire agreements rages on. Additionally, on November 16, 2012, the DOJ filed a civil antitrust action against eBay, Inc., claiming that from 2006 to 2009, eBay violated federal antitrust laws by entering into a "handshake" agreement with Intuit to not hire each other’s employees.

Does the recent spate of antitrust challenges to no-hire agreements mean that negotiated no-hire provisions, which are commonly found in settlement agreements and commercial contracts, face an increased risk of being held unenforceable or, even worse, giving rise to a claim for damages? Probably not. In the 2010 Competitive Impact Statement filed by the DOJ when it settled its antitrust action against Google, et al., the government acknowledged that no-hire agreements that are ancillary to legitimate, pro-competitive collaborations — including contracts with consultants, settlement agreements or mergers and acquisitions — are not per se unlawful under the Sherman Act.

But even a no-hire provision that is ancillary to a legitimate business interest can face a challenge under federal or state antitrust laws if it is broader than necessary to achieve the legitimate business objective. Such challenge could come from the DOJ, a state enforcement agency or even employees who claim to have been adversely affected by the no-hire. In the event of such a challenge, the no-hire agreement must satisfy the rule of reason test, which balances the restraint’s procompetitive benefits against its anticompetitive effects.

In most cases, reasonable no-hire provisions that are ancillary to settlement agreements, consulting contracts, acquisition agreements and similar commercial transactions will satisfy the rule of reason test and present little if any risk of antitrust injury. Employers negotiating a no-hire provision in a settlement agreement or commercial contract can further minimize the risk of a successful antitrust challenge to a no-hire provision by observing a few basic principles. First, no-hire provisions should not be drafted as standalone agreements. Instead, they should be incorporated into a broader agreement so it is crystal clear that the no-hire provision is ancillary to a legitimate business interest, such as settling an employee poaching claim, retaining an outside consulting firm or facilitating a joint venture. Second, the no-hire agreement should be as narrowly tailored as possible by limiting its scope to specific categories of employees, products or services and geographic territories. Third, the no-hire should not be open-ended and should have a reasonable duration. The definition of reasonable in this context will depend to a large extent on the nature and size of the affected industry, the level of competition within the industry and the economic impact the no-hire provision will have within the industry. The inclusion of a severability clause, as well as a provision authorizing a court to “blue pencil” a potentially overbroad no-hire provision, can also be helpful. Finally, employers should carefully review any applicable state laws that could affect the enforceability of a no-hire provision. In California, for example, a no-hire provision that is perfectly reasonable under federal antitrust laws could still run afoul of California’s statutory prohibition of restrictive covenants.

While the outcome and potential impact of the present challenges to no-hire agreements in the high-tech industry remains to be seen, employers can take some comfort that a carefully drafted no-hire provision is unlikely to violate any state or federal antitrust laws provided care is taken to ensure that it is ancillary to a legitimate business purpose, narrowly tailored to accomplish that business purpose and reasonable in scope.