NY Employers May Be Able to Enforce Restrictive Covenants Against California Employees
The Delaware Court of Chancery recently found that California's policy against non-competes is not so fundamental when the employee is represented by counsel and knowingly bargains away such protections—seemingly opening the door for employers to enforce non-compete covenants against California employees.
December 06, 2018 at 02:29 PM
6 minute read
As most labor attorneys know, California has a strong public policy—codified in California Business & Professions Code §16600—disfavoring post-employment covenants not to compete. While out-of-state employers have tried to avoid or minimize California's prohibition on non-competes by using choice of law provisions to select a more favorable jurisdiction's law, those jurisdictions (including New York) that follow the Restatement (Second) of Conflict of Laws (the Restatement) often find that California's fundamental public policy prohibiting restrictive covenants overrides the parties' contractual choice of law. See, e.g., Ascension Ins. Holdings, LLC v. Underwood, No. CV 9897-VCG, 2015 WL 356002 (Del. Ch. Jan. 28, 2015) (declining to enforce Delaware choice-of-law provision for Delaware LLC where application of Delaware law would violate California's “fundamental policy” prohibiting post-employment restrictive covenants).
Times may be changing. The Delaware Court of Chancery recently found in NuVasive, Inc. v. Miles, that California's policy against non-competes is not so fundamental when the employee is represented by counsel and knowingly bargains away such protections—seemingly opening the door for employers to enforce non-compete covenants against California employees. See NuVasive, Inc. v. Miles, No. CV 2017-0720-SG, 2018 WL 4677607 (Del. Ch. Sept. 28, 2018.
NuVasive Seeks to Enforce a Non-Compete Under Delaware Law Against a California Resident. In NuVasive, the plaintiff NuVasive, Inc., a Delaware corporation doing business in California, sought to enforce an employment agreement containing a non-compete and a Delaware choice of law (and forum) clause against defendant-employee Patrick Miles. Miles was a California resident who resigned from NuVasive and began working for a competitor. After NuVasive brought suit, Miles moved for partial summary judgment, arguing that the court should refuse to enforce the parties' choice of law provision, and instead apply California law, thereby vitiating the non-compete.
While Miles' strategy appeared sound (and indeed, the same court granted such relief in Ascension Ins. Holdings v. Underwood), there was a significant development in the interim: California's passage of Cal. Labor Law §925. Section 925 provides that while employers cannot generally require California-based employees to agree, as a condition of employment, to employment agreements containing foreign forum selection or choice-of-law provisions, that prohibition does not apply if the employee is represented by counsel when negotiating the agreement.
Applying the Restatement, the Chancery Court Finds Delaware—Not California—Law Applies. Based upon the passage of §925, the NuVasive court analyzed the parties' choice-of-law provision under the Restatement, and concluded that enforcing Delaware law would not violate fundamental California policy. The Restatement required the court to first determine whether California law would apply in the absence of an express choice-of-law provision, and if yes, whether enforcement of the choice-of-law provision would offend California's “fundamental policy.” The court answered the first question in the affirmative, as Miles was a California resident, NuVasive's principle place of business was in California, and the employment agreement was negotiated in California.
However, the court then found that enforcing Delaware law—which allows restrictive covenants—would not offend fundamental California policy because Miles was represented by counsel when he agreed to a Delaware choice of law provision. The court explained that while California has a fundamental public policy against non-competes, the California legislature made a policy decision in passing §925 that “when contracting parties' rights are protected by representation, freedom of contract trumps this interest [in prohibiting restrictive covenants.]” NuVasive, 2018 WL 4677607, at *5. And since Miles was represented by counsel when he agreed to the non-compete, the court thus concluded that upholding “the Delaware choice of law and thereby potentially enforcing the covenant not to compete would not violate California's fundamental public policy.” Id. at 6.
Notably, even though the parties entered into the contract before California's passage of §925, the court nevertheless concluded that California's passage of the statute suggested that enforcing a non-compete in California would not necessarily violate fundamental California policy—so long as the employee was represented by counsel. Id.
Interestingly, while the court did not expressly consider §925's legislative history in its decision, the court's interpretation of California policy is likewise supported by the legislative history. Specifically, the legislative history notes that because §925 “is aimed at protecting employees who may not have sufficient bargaining power throughout the employment relationship, this bill exempts employment contracts where an employee is individually represented by legal counsel in negotiating terms of an agreement that designate venue or choice of law” and that these exemptions are “consistent with the policy goal of this bill: Californians should be bound by potentially one-sided terms only if the Californian knowingly and voluntarily agrees to such terms.” 2015 CA S.B. 1241 (NS) Aug. 30, 2016 Committee Report (emphasis added).
|Takeaway
Section 925 appears to be a game changer for California non-competes. While the NuVasive court downplayed the significance of its decision by citing the “narrow” circumstances of the case, employers should nevertheless take note of this ruling, as it may provide a roadmap for enforcing restrictive covenants against California employees. Indeed, under the logic of NuVasive (and a plain reading of the statute), it would appear that so long as an employee was represented by counsel, he or she may forgo the protections of California law and agree to be bound by restrictive covenants that would be unenforceable under California law but would be enforceable under another state's laws.
Of course, such a strategy may not always make fiscal sense, but when dealing with particularly important employees, it may be worth retaining independent counsel for such employees (even if paid for by the company) in order to fall within §925's exception. It should also be noted that, to date, no California state court has addressed this issue in a published opinion, rendering the NuVasive decision as a bit of an outlier (or a trailblazer, depending on one's perspective).
Sean E. O'Donnell is a litigation partner, and Patrick Johnson is a litigation associate in the New York office of Herrick, Feinstein. Mr. O'Donnell and Mr. Johnson are trial lawyers focusing on complex commercial litigation, including employment related disputes.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllA Motion to Dismiss, a Reduced Sentence Request, and a Motion to Remand
8 minute readJudges Say Social Media and Political Polarization Puts Them in Danger
Trending Stories
Who Got The Work
Dechert partners Andrew J. Levander, Angela M. Liu and Neil A. Steiner have stepped in to defend Arbor Realty Trust and certain executives in a pending securities class action. The complaint, filed July 31 in New York Eastern District Court by Levi & Korsinsky, contends that the defendants concealed a 'toxic' mobile home portfolio, vastly overstated collateral in regards to the company's loans and failed to disclose an investigation of the company by the FBI. The case, assigned to U.S. District Judge Pamela K. Chen, is 1:24-cv-05347, Martin v. Arbor Realty Trust, Inc. et al.
Who Got The Work
Arthur G. Jakoby, Ryan Feeney and Maxim M.L. Nowak from Herrick Feinstein have stepped in to defend Charles Dilluvio and Seacor Capital in a pending securities lawsuit. The complaint, filed Sept. 30 in New York Southern District Court by the Securities and Exchange Commission, accuses the defendants of using consulting agreements, attorney opinion letters and other mechanisms to skirt regulations limiting stock sales by affiliate companies and allowing the defendants to unlawfully profit from sales of Enzolytics stock. The case, assigned to U.S. District Judge Andrew L. Carter Jr., is 1:24-cv-07362, Securities and Exchange Commission v. Zhabilov et al.
Who Got The Work
Clark Hill members Vincent Roskovensky and Kevin B. Watson have entered appearances for Architectural Steel and Associated Products in a pending environmental lawsuit. The complaint, filed Aug. 27 in Pennsylvania Eastern District Court by Brodsky & Smith on behalf of Hung Trinh, accuses the defendant of discharging polluted stormwater from its steel facility without a permit in violation of the Clean Water Act. The case, assigned to U.S. District Judge Gerald J. Pappert, is 2:24-cv-04490, Trinh v. Architectural Steel And Associated Products, Inc.
Who Got The Work
Michael R. Yellin of Cole Schotz has entered an appearance for S2 d/b/a the Shoe Surgeon, Dominic Chambrone a/k/a Dominic Ciambrone and other defendants in a pending trademark infringement lawsuit. The case, filed July 15 in New York Southern District Court by DLA Piper on behalf of Nike, seeks to enjoin Ciambrone and the other defendants in their attempts to build an 'entire multifaceted' retail empire through their unauthorized use of Nike’s trademark rights. The case, assigned to U.S. District Judge Naomi Reice Buchwald, is 1:24-cv-05307, Nike Inc. v. S2, Inc. et al.
Who Got The Work
Sullivan & Cromwell partner Adam S. Paris has entered an appearance for Orthofix Medical in a pending securities class action arising from a proposed acquisition of SeaSpine by Orthofix. The suit, filed Sept. 6 in California Southern District Court, by Girard Sharp and the Hall Firm, contends that the offering materials and related oral communications contained untrue statements of material fact. According to the complaint, the defendants made a series of misrepresentations about Orthofix’s disclosure controls and internal controls over financial reporting and ethical compliance. The case, assigned to U.S. District Judge Linda Lopez, is 3:24-cv-01593, O'Hara v. Orthofix Medical Inc. et al.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250