Monday, January 5, 2009

Federal Court in Pennsylvania Upholds Choice-of-Law Clause (Perma-Liner Industries v. U.S. Sewer & Drain)

Choice-of-law clauses continue to be a ripe area of litigation, with rules and cases that yield results difficult to reconcile.

Disputes frequently arise when a corporation is headquartered or maintains its principal place of business in one state, while the employee works in another state. Almost always, the choice-of-law clause provides for application of the law from the employer's home state. Is such a provision valid, particularly if the employee's only real connection to the forum state is that his employer is based there?

That was the issue in Perma-Liner Industries v. U.S. Sewer & Drain, where the district court in Pennsylvania upheld a Florida choice-of-law clause in a Pennsylvania employee's contract. Perma-Liner was a Florida-based company, and this apparently was enough to validate the clause and give effect to the terms of the written agreement.

The trend in these choice-of-law cases appears to be a sharp move towards upholding the validity of the choice-of-law clause, unless it is so totally arbitrary to be unreasonable. In a garden-variety breach of contract case, the choice of substantive state law matters little. For the most part, contract law is static across state lines.

Not so in non-compete cases. Each state has permutations and quirks and odd precedents on which either side can rely. The Perma-Liner case is a perfect example. In Pennsylvania, continued employment is not sufficient consideration for execution of a non-compete agreement, while in Florida it is. Had the employee signed the non-compete after he began work - there is no indication that was the case in the lawsuit - then choice of law could be outcome-determinative on this issue alone.

In fact, Florida is perhaps the most employer-friendly state for non-compete law. The fact a Pennsylvania federal court held no public policy was implicated in applying Florida law to a Pennsylvania employee does not bode well for others seeking to invalidate a choice-of-law provision.

The black-letter law is fairly simple: choice-of-law clauses will be honored, unless: (a) the chosen state has no substantial relationship to the dispute; or (b) application of the chosen state's law is contrary to a fundamental public policy of a state with a materially greater interest in the dispute (i.e., the state where the employee lives and works). It is the latter exception that employees often rely upon. But mere differences in non-compete law, even ones that are outcome-determinative, will not suffice to implicate public policy concerns.

Outside of a completely arbitrary selection (for instance, choosing employer-friendly Florida law when neither the employer nor employee have any connection there at all), I can envision two paradigms where choice-of-law clauses may give employers problems if they seek to enforce them against out-of-state employees: (a) anything involving a California resident; and (b) application of Delaware law if the only connection is incorporation to take advantage of its body of corporate law.


Court: United States District Court for the Eastern District of Pennsylvania
Opinion Date: 12/31/08
Cite: Perma-Liner Indus., Inc. v. U.S. Sewer & Drain, Inc., 630 F. Supp. 2d 516 (E.D. Pa. 2008)
Favors: Employer
Law: Pennsylvania

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