Solving the Multi-State Non-Compete Puzzle Through Choice of Law and Venue

Differences among state non-compete laws create practical difficulties for employers and practitioners. Assessing enforcement likelihood often turns on which state’s law should apply, particularly where an employee has worked in different states. One way of trying to obtain some measure of predictability is through contractual choice of law and venue provisions. While these provisions may help make outcomes more predictable in some circumstances, the degree of predictability can vary dramatically.

This article will address developments over the last few years where courts have assessed the viability of contractual choice of law and mandatory forum provisions in non-compete contracts in California, Massachusetts, and Texas. An analysis of legal developments in these states provides practical guidance for drafting enforceable non-compete agreements and assessing the likelihood of enforcing existing agreements.

California

Not surprisingly, many of the “race to the courthouse” cases involve California, where most customer non-solicitation and nearly all non-compete covenants are unlawful under Section 16600 of the California Business and Professions Code. Consequently, employers often include in employment agreements a choice of law provision of another state. However, a recent case in California suggests that this practice may not always produce the desired result.

In Arkley v. Aon Risk Services Co. Inc. (2012), three former employees filed suit in California federal district court seeking a declaration that an agreement prohibiting solicitation of former customers was unlawful. The employment agreement contained an Illinois choice of law clause, but apparently no mandatory venue provision. The employees were all California residents, worked for the defendant employer in California, and intended to work for a competitor in California.

The court had little difficulty in refusing to enforce the Illinois choice of law provision, finding that California had a materially greater interest than Illinois in the outcome of the case. Citing Application Group Inc. v. Hunter Group Inc. (1998), the court emphasized that it would have reached the same result even if the employees initially had resided in a different state and later had moved to California to work: “California’s strong interest extends to ‘persons whom California-based employers . . . wish to employ to provide services in California, regardless of the person’s state of residence or precise degree of involvement in California projects,’ and it includes allowing California-based businesses to ‘compete effectively for the most talented, skilled employees in their industries.’ ” Id.

On the other hand, California courts generally have declined to grant injunctions to prevent non-compete lawsuits in other states, even where the employees involved were California residents. For example, in Advanced Bionics v. Medtronic (2002), the California Supreme Court reversed a temporary restraining order enjoining Medtronic’s prosecution of non-compete litigation in Minnesota against a California resident under an employment contract with a Minnesota choice of law provision. The court held that it lacked the authority to enjoin litigation in another state and that the illegality of non-compete agreements in California did not warrant an anti-suit injunction.

California courts also have refused to grant declaratory judgments to interfere with parallel non-compete litigation filed in other states. See, e.g., Google Inc. v. Microsoft Corp. (2005) (granting a stay to allow parallel litigation in Washington to proceed rather than deciding the merits of plaintiff employees’ declaratory judgment action); Swenson v. T-Mobil United States Inc. (2006) (dismissing a declaratory judgment action where a Washington federal court had ruled on the choice of law issue and applied Washington law under the parties’ contract.)

Massachusetts