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EMPLOYER END-RUNS AROUND CALIFORNIA’S PUBLIC POLICY AGAINST EMPLOYEE NON-COMPETITION AGREEMENTS

With limited exceptions, California courts treat non-competition agreements with California based employees as unenforceable restraints on trade contrary.  Companies headquartered outside of California, however, often seek to avoid this outcome by using choice of law and forum selection clauses in their California employment agreements—provisions which say the agreement is governed by the law of specified state other than California (choice of law), and that lawsuits must be heard in the courts of such other state (forum selection).  The states such employers tend to choose include New York, Pennsylvania, Massachusetts, Washington and others with courts willing to enforce noncompetition agreements—even in the absence of evidence the former employee is competing unfairly by, for instance, using the employer’s trade secrets or other confidential information.

Employee Declaratory Relief Counter-Suit in California

 California based employees sued, or threatened with suit, by a non-California headquartered employer can, and do, bring a so-called declaratory relief suit in California—seeking a declaration that the non-competition clause is unenforceable against him or her in California.  Where the employee’s contract, however, includes both a choice of law clause and a forum selection clause—employers in some circumstances have prevailed in causing the employee’s California declaratory relief claim to be dismissed arguing that the forum selection clause is enforceable – meaning the litigation must proceed in the employer’s selected forum even though the employee is in California.  In this circumstance  the likelihood of the California employee prevailing increases to the extent he or she in fact had no meaningful connection to the employer’s chosen litigation forum during his or her employment. This includes consideration of factors such as where the noncompete agreement was signed and how often the employee visited the employer’s selected forum state in the course of employment.

Takeaway for California Based Employees of Non-California Headquartered Employers

The takeaway for the California based employee is, first and foremost, to familiarize oneself with the choice of law and/or choice of forum clause in one’s agreements before signing with an employer headquartered outside of California.  This is particularly the case for an employee who believes the prospective employer might regard him or her as a threat were he or she to later leave and seek to compete.  Such employees, however, tend to have some negotiating leverage at the commencement of the employment relationship, and may find it easier to negotiate removal of the employer’s selected dispute resolution forum clause than the non-California choice of law clause.  This should sufficiently protect the employee, however, because, as indicated, a California based employee seeking to compete fairly in California—meaning against a former employer without using such employer’s confidential information or trade secrets, will be much more likely to ultimately prevail should an employer headquartered outside of California sue to enforce a non-competition agreement where that agreement omits an employee unfriendly dispute resolution forum.

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