Tuesday, March 25, 2014

Saving Non-Competes with Forum Selection Clauses

I have been counseling a lot of clients on the use of non-compete agreements lately, and given our firm-centric focus in California, the issue often arises as to whether non-competes can ever be enforced for California employees.

Typically, the answer is “no”; California law categorically rejects any type of post-employment restriction on an employee's ability to seek work, even with a directly competing company. In addition, California courts historically reject employer efforts to get around the California non-compete rule by using a choice of law provision designating a non-compete friendly jurisdiction to hear any disputes. But a recent Supreme Court decision might be giving some life to the ability of out of state employers to enforce their non-compete provisions on their California work force.

The Supreme Court case held that contractual forum selection clauses should be enforced unless particularly unfair or exceptional circumstances exist. The ruling follows the trend already established in some California federal court cases. In one case, a Washington-based employer was permitted to enforce its Washington forum selection clause and choice of law provisions against California sales employees who left for a competitor. When the employer filed suit in Washington, pursuant to the selection clause, the employees tried to block the action by suing in California federal court. But the California federal court determined that the forum selection clause was valid. Other California federal courts have found forum selection clauses valid, for example in the case of a Pennsylvania company seeking to transfer non-compete cases from California to Pennsylvania. In both cases those courts ruled that the possibility that Pennsylvania law might be applied to the non-compete clauses was not a sufficient basis to void the forum selection clause in the employment agreements.  And a recent state court decision applying Pennsylvania law to a California resident employee is here.

So for non-California based employers, don’t give up hope with respect to your non-compete agreements. But you should start now, drafting provisions, in your employment agreements that contain forum selections clauses as well as choice of law provisions. The tide may be turning in a way that allows you to protect your business.

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