Partner Departure Law

April 12, 2015

Partner Departures and Golden v. California Emergency Physicians Medical Group: Does California’s Business and Professions Code § 16600 Void Any Partnership Provision that Restricts a Departing Partner’s Right to Compete?

The Ninth Circuit’s recent decision, filed April 8, 2015, in Golden v. California Emergency Physicians Medical Group (9th Circuit) Case No. 12-16514, has potentially far-reaching implications for what is deemed to be an unlawful professional restraint in violation of California’s Business and Professions Code § 16600. In closely examining the statute, the Ninth Circuit concluded that the reach of § 16600 does extend far beyond non-compete provisions to every contract restraining someone from “engaging in a lawful profession, trade or business.” With respect to partner departures, some restrictions contained in partnership agreements in anticipation of dissolution or partner departure are excluded from this rule by Section 16602. However, even non-compete agreements between partners, and other contractual provisions that have a similar effect, may be unenforceable if they impose any restrictions on a partner’s right to practice law not contemplated by Section 16602.

The controversy in Golden was about a settlement agreement that resolved the employment discrimination claim of a physician, Dr. Golden. The settlement agreement contained a “no re-hire” provision by which Dr. Golden “waive[d] his rights to employment with the defendant or at any facility that the defendant may own or with which it may contract in the future.” The parties had in open court agreed to the terms of the settlement and the settlement was then reduced to writing. When it came time to sign, Dr. Golden refused. The agreement was instead entered into on Dr. Golden’s behalf by his attorney, who was seeking the settlement agreement’s enforcement in order to collect upon a contingency fee.

The issue of the enforceability of the agreement against Dr. Golden went before the magistrate judge assigned the case. The magistrate judge recommended that Dr. Golden be compelled to sign the settlement agreement, and the district court fully adopted this recommendation. Dr. Golden still refused to sign, choosing to appeal instead. The Ninth Circuit dismissed the appeal for lack of jurisdiction, and Dr. Golden’s now former counsel took the controversy back to the district court, seeking the district court’s intervention and enforcement of the settlement agreement. The district court granted the motion to intervene and ordered the settlement agreement enforced over Dr. Golden’s objections, including that the “no-rehire” provision violated California Business & Profession Code § 16600: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Rather than sign the agreement, Dr. Golden again appealed. While in the district court Dr. Golden had made multiple arguments for invalidating the settlement agreement, “including friction with his counsel, inadequate advice, and severe personal stress,” Dr. Golden’s sole argument on appeal was that “the no- employment provision of the agreement violates California law as a contract restraining the lawful practice of a profession.” The Ninth Circuit, in a split panel (Judge O’Scannlain writing the opinion, Judge Kozinski dissenting), considered the explicit language of the California Business & Profession Code provision, the legislative intent, and prior decisional law to determine whether § 16600 has any applicability beyond “typical so-called non-compete covenants” and provisions imposing a penalty against those going to work for a competitor.

The Ninth Circuit held:

In the first place, section 16600 of the California Business and Professions Code provides 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.” The statute does not specifically target covenants not to compete between employees and their employers: the text does not include any form of the word “compete” or “competition,” and does not even implicitly constrain itself to contracts concerning employment. Rather, section 16600 voids “every contract” that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.” Id. (emphasis added).

The breadth of this statutory prohibition appears even more stark when read alongside the successive provisions in the Code that admit of a few, narrow exceptions. Section 16601 permits a business owner selling his interest in the company, under certain circumstances, to “agree with the buyer to refrain from carrying on a similar business within a specified geographic area.” Likewise, section 16602 countenances an agreement among partners, upon dissociation or dissolution of the partnership, “not [to] carry on a similar business within a specified geographic area.” . . . . Such statutory exceptions seem by their plain language to correspond to more conventional non-compete covenants. Given the different, narrower language with which such sections describe the category of contracts excepted from the ban, we reasonably expect the general prohibition to extend further.

When carving out exceptions to section 16600, the California legislature demonstrated an ability to describe, with considerable detail, a subspecies of the contracts “by which anyone is restrained from engaging in a lawful profession, trade, or business.” But when articulating the general rule against professional restraints, the legislature adopted categorical language: “every contract” that “restrain[s]” anyone “from engaging in lawful profession . . . of any kind” is “void.” Id. § 16600 (emphasis added). Accordingly, the statutory context lends little support to construing section 16600 much more narrowly—as simply a prohibition of agreements between employers and employees not to compete—than its plain language would otherwise suggest.

The Ninth Circuit panel also examined state decisional law interpreting § 16600, and pointed to Edwards v. Arthur Andersen LLP, 189 P.3d 285 (Cal. 2008), where the California supreme court “rejected a proposed rule—apparently suggested by earlier California cases and extended by the Ninth Circuit—‘that a mere limitation on an employee’s ability to practice his or her vocation would be permissible under section 16600, as long as it was reasonably based’.”

For the Ninth Circuit panel hearing the Golden case, California Business and Professions Code § 16600 extends to “any restraint of a substantial character,’ no matter its form or scope.” (citing Chamberlain v. Augustine, 156 P. 479, 480 (Cal. 1916)). However, the decision never resolves whether or not the contract provision at issue, the “no-rehire” clause, was such a restraint of “substantial character,” thereby rendering it unenforceable. The Ninth Circuit leaves this to the district court to decide, remanding the case “for further proceedings not inconsistent with this opinion.”

The Golden case will remain on this firm’s watch list because of its potential applicability to law firm partnership agreements that routinely attempt to impose restrictions on departing partners, from required lengthy notice periods to prohibitions on a departing partner’s communications with clients and employees. Although as discussed, some restrictions imposed on law firm partners are permitted by Section 16602, the analysis in Golden could be used to void other partnership provisions that restrict a departing partner’s right to compete. Thus, prior to considering departing from a partnership, a partner needs to give careful consideration and analysis to any non-compete agreements or contractual restrictions on his/her right to practice law imposed by the existing partnership agreement.

(Editor’s note: Rebecca Epstein, a Senior Consulting Attorney in the Firm’s San Francisco office, contributed to this article.)

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