This article was originally published in Venable's Trade Secrets & Transitions Blog.
California's state and federal courts are loath to enforce choice of law provisions allowing the law of an out-of-state employer's home state to control the validity of a California employee's non-compete. But California's federal courts will uphold forum selection clauses stipulating that the home state must make the choice of law determination, dramatically increasing the likelihood that the non-compete will be upheld.
California Business & Professions Code Section 16600 (Section 16600), which codifies California's public policy against covenants not to compete, poses a formidable challenge to out-of-state businesses that employ Californians. Nevertheless, companies unfamiliar with doing business in California continue to use standard employment agreements containing such covenants to govern their California employees. "Reasonable" covenants may survive judicial scrutiny in most U.S. jurisdictions, but such provisions are void under California law. Indeed, the use of such covenants is considered an unfair business practice in California.
To attempt to elude Section 16600’s reach, out-of-state employers routinely rely on two provisions: choice of law and forum selection clauses. The former stipulates that the law of the employer's home state must be used to interpret the agreement. The latter states that the venue of actions relating to the agreement must be in the non-California employer’s home state.
However, as many out-of-state employers have found out the hard way, California state courts will not honor such provisions. Thus, California employees seeking to move to a competitor will often file for declaratory relief invalidating their covenants not to compete in California state court, despite non-California choice of law and forum selection clauses.
So what is an employer's recourse in this situation?
Unfortunately, like California state courts, California federal courts will not enforce choice of law provisions stipulating to employer-friendly jurisdictions in the non-compete context.
Under the right circumstances, however, out-of-state employers may rely on a body of well-developed case law in California federal courts that allows the parties’ bargained-for non-California forum to be enforced in the Section 16600 context – even where an employee files first in California. Moreover, these courts explicitly reject the argument often made by departing employees that enforcing a forum selection clause effectively violates Section 16600, because a non-California court applying non-California law is more likely to enforce a covenant not to compete that would unquestionably be void in California.
Accordingly, one possible solution for out-of-state employers faced with a California employee's declaratory relief action in California state court is to (1) file suit in the stipulated jurisdiction; (2) remove the employee's California state court case to federal court; and (3) move to dismiss, stay, or transfer the California action to the employer's stipulated forum. While your home state may still decline to enforce the choice of law provision, in the Section 16600 context a non-California court is much more likely to choose to apply non-California law than any California court. Of course, all of this is based on the assumption that your non-compete is compliant with your home state's law.
Navigating these procedural hurdles is a costly and time-consuming process with no guarantee of success, even for experienced practitioners. Thus, it must be determined at the outset of the case whether it makes practical sense to attempt to enforce your non-compete. Money and time may very well be better spent revising outdated employment agreements for California employees or for non-litigation purposes altogether.