Saturday, January 12, 2013

Playing the California Card Doesn't Always Work

Anyone familiar with non-competes knows that California is somewhat of an outlier state. Non-compete agreements, even non-solicitation agreements, are highly disfavored and almost always unenforceable except within a narrow band of cases.

One issue that has arisen frequently over the last several years in non-compete disputes is the forum fight involving California. This usually arises when California has some, but not a complete, connection to the dispute. How does that connection arise? Usually in one of two ways:

1. The party bound by the non-compete lives or is domiciled in California.

2. The prospective business opportunity somehow bears a substantial relationship to California. An example? The new employer is based there. Or, even better, the employee's job calls for him to move to California.

Employees seeking to void non-competes have been aggressive in recent years in filing preemptive declaratory judgment actions in California courts when that state has some arguable connection to the parties' business relationship. And, in many cases, California courts have issued judgments that invalidate the contract as an illegal restraint under California's Business and Professions Code.

But the problem is more nuanced when another state also has a substantial interest in the case. For instance, a national company with a footprint in many states may use one form agreement calling for another state's choice of law, or even a forum selection clause. If an employee lives in California, the presence of choice-of-law and choice-of-forum clauses would undercut California's interest in the dispute, since another state (most likely, that where the employer maintains its nerve center) has an equal interest in regulating its out-of-state affairs on a uniform, consistent basis.

So these competing interests can lead to forum fights? What to do?

I am probably in the minority on this, but I happen to feel that the New York court got it right in the Aon Risk Services v. Cusack decision this past week when it refused to dismiss a suit on venue grounds in favor of a pending California case. Even though the defendant, Peter Arkley, was a California resident working for an Aon subsidiary principally in California, Illinois law governed his employment agreement (it contained a narrow, 2-year non-solicitation covenant). And Aon commenced injunction proceedings in Illinois (and later New York state court) right after Arkley's preemptive strike suit in California. Arkley was enjoyed in Illinois and in New York, despite the presence of his California action.

Fights over venue when there is a California connection are not easy to resolve, and courts have to be respectful of litigation in other states. But in my opinion, courts should take a pragmatic approach and decline to override choice-of-law provisions in all but a narrow set of cases. It makes little sense why a New York entity can't have one state's laws govern all of its contracts, unless that choice is completely arbitrary.

There's also an easy fix to this. If a state decides that choice-of-law clauses over its residents' non-compete agreements should not be enforced, then it can pass a law making this established public policy. I happen to think that venue and choice-of-law fights are unfortunate, expensive distractions in cases demanding a quick resolution. This is one of many reasons that the presence of choice-of-law and choice-of-forum clauses ought to command great deference.

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