No-Rehire Clauses Get the Axe in California?

By: Michele Haydel Gehrke

California employers should take note of Golden v. Cal. Emergency Physicians Medical Group, No. 12-16514 (9th Cir. Apr. 8, 2015), in which the Ninth Circuit used a broad interpretation of California Business and Professions Code Section 16600 to create a new framework under California law for the enforceability of “no-rehire” clauses commonly found in severance and settlement agreements.  While the Court’s decision does not invalidate all no-rehire clauses, employers can no longer presume that no-rehire clauses are enforceable in California.  Importantly, merely including a no-rehire clause in a California severance or settlement agreement may invite legal challenges that invalidate the entire agreement and expose an employer to unfair business practice claims.

The Ninth Circuit in Golden noted, contrary to the district court’s analysis, that Section 16600 is a statute of “considerable breadth” that is not limited in its application to covenants not to compete.  Accord Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), Construing the holding in Chamberlain v. Augustine, 156 P. 479 (Cal. 1916), the panel majority held that “the crux of the inquiry under section 16600 is not whether the contract constituted a covenant not to compete, but rather whether it imposes a restraint of a substantial character regardless of the form in which it is cast." 

Although Golden does not hold that all no-rehire clauses are void under Section 16600, it may, in certain factual instances, practically foreclose no-rehire clauses in California severance and settlement agreements where the employer seeks finality regarding the employment relationship at issue, particularly if the scope of the no-rehire clause extends to future entities the employer may acquire an ownership or management interest in.  The mere presence of the no-rehire clause in Golden was enough for the Ninth Circuit to remand for a factual inquiry as to whether the clause “imposes a restraint of substantial character” on the employee’s ability to practice his chosen profession.  This factual inquiry, as noted by dissenting Judge Kozinski, invites speculation about whether the no-rehire clause will affect the employee’s ability to obtain future employment and thus presents an unworkable and unpredictable legal standard. Unless the California Supreme Court interprets California law differently in a future case, Golden will remain a difficult decision for employers.

The perils of Golden for employers are further compounded by the California public policy invalidating choice of law clauses governing restrictive covenants and applying Section 16600 to any employment matter arising in California.  An employee with unique or specialized skills who is bound by a no-rehire clause valid under the law of another state may retreat to California and seek to negate the no-rehire clause for purposes of seeking re-employment in California under Golden.  Employers with offices in California should consult with experienced counsel to assess the effect of Golden on existing no-rehire clauses nationwide and whether to seek enforcement of such clauses when former employees outside California seek re-employment in California.  In addition, employers with offices in California may consider carving out California from the scope of future no-rehire provisions.