It was only a matter of time…

It was only a matter of time… we now have a decision.

For years, we’ve wrestled with how to handle enforcement or defense of a noncompete agreement between a California employee and an out-of-state employer. It frequently involved a race to the courthouse.

Then, in 2013, the United States Supreme Court gave us Atlantic Marine, and suddenly there was a strong argument that a choice of law and forum provision in a noncompete would be enforced in federal court. When applied in the context of noncompete agreements like the ones described above, it was generally followed – and not just by courts outside of California, but federal courts in California as well.

The California legislature was certainly not going to stand by and allow the Supreme Court (it is, of course, just some court of another jurisdiction) to undermine the strongly-held California public policy against noncompetes through the use of a simple choice of law and forum provision.

Enter California Labor Code section 925.

Through California Labor Code section 925, effective for contracts “entered into, modified, or extended” on or after January 1, 2017, California prohibited the use of forum selection and choice of law provisions in contracts with California residents who work in California.

However, the legislature included an exception: The prohibition does not apply “to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.” Cal. Lab. Code § 925(e).

So, where does that leave the battle of forums?

Enter the Delaware Chancery Court.

On September 28, the Delaware Chancery Court answered the question in NuVasive, Inc. v. Miles.

It focused on the intersection of California’s two statutes at issue:  California Business and Professions Code section 16600 (the 1872 ban on noncompetes) with California Labor Code section 925(e). The court reasoned as follows:

In Section 925, I find, the California legislature has stated strongly its general view that the prohibition of covenants not to compete (as well as other requirements of its labor law) cannot be evaded by choice of law provisions, but has made a policy decision that when contracting parties’ rights are protected by representation, freedom of contract trumps this interest.

… California’s policy is expressed statutorily, and in the precise situation under review, currently permits parties to choose law that will vindicate covenants not to compete.

… California has passed a law that recognizes the validity of choice of law provisions in the narrow circumstance where an employee has legal representation during negotiations. Upholding the Delaware choice of law and thereby potentially enforcing the covenant not to compete would not violate California’s fundamental public policy, because this case falls into that narrow exception.

… I note, however, that although California maintains a strong interest in prohibiting covenants not to compete, that interest is slight in the specific instance, as here, where the parties’ bargaining power is equalized by counsel for the employee negotiating the covenant and a choice of law provision thatwill vindicate it. Against this weak interest is Delaware’s fundamental but general interest in freedom of contract. Given those competing interests, I cannot say that California has a “materially greater interest” than Delaware.

Now what?

Should out-of-state companies start (if they weren’t already) using noncompetes in California? Maybe. If so, it would certainly be advisable to ensure that the employee is not just told of the right to be represented by counsel, but is in fact represented by counsel.

 

Thanks to Karen E. Wentzel of Squire Patton Boggs for finding the case.

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