Tuesday, October 18, 2016

Changes on the Horizon: Venue and Choice-of-Law Provisions in California Contracts

One of the most vexing procedural issues in recent years has been what to do with out-of-state litigation against a California employee. The contractual framework usually goes something like this:

  1. California resident has a non-compete covenant in an employment contract.
  2. California resident leaves to compete.
  3. The contract contains a choice-of law and choice-of-venue provision that applies some other state's law.
  4. That other state's law is more employer-friendly than California.
  5. Litigation commences in the contractually selected state.
  6. And sometimes, the employee files satellite litigation in California to get around the contractual framework.
Unfortunately, courts have not resolved these questions in a consistent manner. Some states, like Illinois and Delaware, appear to give primacy to California's overarching public policy interest embodied in its long-standing statutory prohibition on non-competes. Other states are more willing to enforce the venue and choice-of-law provisions despite that well-known California policy.

The question may get easier to resolve next year, when Section 925 of the California Labor Code goes into effect.That law will bar the procedural hurdles California employees sometimes face and give him or her the option to void contractually agreed-to venue and law provisions. An aggrieved employee also may recover fees arising out of this procedural dispute and may obtain an injunction in California against parallel litigation in another state.

Section 925 contains a potentially broad exception, stating that it "shall not apply to an employee who is individually represented by legal counsel in negotiating the terms of an agreement to waive any legal right, penalty, remedy, forum, or procedure for a violation of this code." In other words, if an employee engages counsel and waives Section 925 (and presumably gets some payment for that waiver), then the employee cannot undo the change after the fact.

By its plain language, the Section 925(i) exception does not apply to any individually negotiated agreement - only those where the actual agreement results in an express waiver of a challenge to foreign venue and choice-of-law rights.

Section 925 represents a legislative solution to a potentially serious problem of interstate comity involving California residents. In fact, it's exactly what I advocated for in a post nearly four years ago - which you can find here. I choose to be positive and will assume that the fine legislators in California relied on my blog post in crafting Section 925.

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