From left to right: Brian E. Dickerson ('96) and Jon Secrest
By Brian E. Dickerson ('96) and Jon Secrest
In the last two years, Brian E. Dickerson ('96) and Jon Secrest of Roetzel & Andress have been involved in numerous disputes and litigation over employment agreements containing non-compete clauses within the sports industry. What has been discovered in sports industry businesses is that significant money is spent on executive search teams and recruiting protocols, but little on the specifics of the employment agreement. Even worse, less attention is paid to how employment agreements are enforced. There are businesses using form employment agreements that contain non-compete clauses with language no longer enforceable. Other businesses have moved operations to a different state, but are still utilizing the same choice of law provision from the previous state, even though no employees work in that state. For one client, it was beneficial that a very high profile sports operation had selected a state law to govern its non-compete clauses that presumed non-compete provisions invalid. This article demonstrates how important it is for businesses in every industry to spend time to insure their employment agreements and the necessary provisions are enforceable for all employees and that the business enforce the agreements.
Many employers utilize non-compete agreements to prohibit employees from working for competitors. Most employees enter into non-compete agreements because they are often presented in the context of “if you want this job, you have to sign.” The enforceability of non-compete agreements hinges on numerous considerations. There are the usual contract formation necessities, such as consideration. Some states determine that continued at-will employment is sufficient consideration, while other states require more. The most important factor in determining whether a non-compete agreement is enforced is what state’s law will apply. There are currently 19 states with enacted statutes addressing non-compete agreements.
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Most sophisticated businesses and attorneys are well-acquainted with choice of law provisions in contracts. Such provisions provide predictability in which state’s laws will apply and as to the ultimate outcome of litigation related to the specific contracts. There are many advantageous benefits to including a choice of law provision in a contract. Containing a choice of law provision in a non-compete agreement is imperative as states differ in their views of non-compete agreements and courts will first look to the law designated by the parties.
As an example of the divergent views on non-compete agreements, consider the following:
- Florida presumes non-compete agreements are valid and presumes that a restriction preventing an employee from competing for six months is reasonable;
- Ohio presumes non-compete agreements are valid and even if certain terms of a non-compete are determined invalid, a court will modify the terms to what the court deems reasonable.
- Oregon presumes non-compete agreements invalid as illegal restraints on trade unless employers meet certain requirements.
- Massachusetts, unlike many other states, requires that if the terms of employment are materially altered then any prior non-compete agreements are invalid.
- In New York, unlike Florida, if you terminate an employee without cause, then you have little chance of enforcing a non-compete agreement.
- California2 and North Dakota3 are the only two states who actually enacted legislation prohibiting non-compete agreements.
It is evident from these examples that some states are more employer-friendly and some are more employee-friendly. Most employers include a choice of law provision designating the state of their incorporation or the state in which they maintain their principal place of business as the law that applies. This, however, may not be enough to protect your interests. California courts have determined that choice of law provisions in non-compete agreements with California employees are invalid.
4 This means that if you attempt to enforce a non-compete against an employee located in California, you stand little chance of succeeding if you file in a California court. California has even gone as far as to say that a Maryland resident working for a California-based employer is entitled to the benefit of California Business & Professions Code Section 16600, which prohibits non-compete agreements.
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The $64,000 question is how do you guarantee that your non-compete agreement will be enforced? The initial step that must be taken is to include a choice of law provision in the non-compete agreement. As noted above, California refuses to enforce choice of law provisions when California employees are involved so relying solely on a choice of law provision is not enough. The next logical step is to file any action to enforce the non-compete agreement in the state whose law you designated in the non-compete. Employers will be limited in employing these methods to states which bear contacts with the actual employment and non-compete agreements. Courts may refuse to enforce choice of law provisions if they determine that another state has a materially greater interest in the matter.
Dealing with choice of law provisions and conflict of law principles related to contracts used to be a simple inquiry. The general rule followed was lex loci contractus, or the law of the location where the contract was entered into governs. In today’s digital world, where agreements are sent electronically for signatures, the place where the contract was entered into is not as easy to discern. Is the location where the representative of the employer signs the non-compete or the place where the employee signs the agreement the location where the contact was entered into?
Most states follow § 187 of the Restatement of Law in resolving such conflicts. This section sets forth principles to follow in resolving conflicts when the parties have included a choice of law provision in their contract. This section provides:
- The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
- The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
- In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
The first provision of this section instructs courts to apply the law chosen by the parties, which is why choice of law provisions are essential. It is apparent from § 187 that there is wiggle room for a court to apply a law other than that selected by the parties. This is especially true when the law of the state chosen has no substantial relationship to the parties. This prevents an employer from simply designating the law of a state, such as Florida, that is employer-friendly if the parties have no relationship with the state. Subsection (b) also provides courts with latitude to disregard choice of law provisions by use of the language “application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue…” California and North Dakota, for example, specifically enacted legislation prohibiting non-compete agreements and their courts have disregarded choice of law provisions on the basis they are contrary to the state’s fundamental policies. Likewise, Georgia has disregarded choice of law provisions by determining they are contrary to the state’s fundamental policies even Georgia has no statute prohibiting non-compete agreements.
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You may think so what, I don’t do business in Georgia, California, North Dakota, or any other jurisdiction that does not favor non-compete agreements. While that may be true, what happens if one of your employees moves to one of these states and begins working for a competitor? Consider the following:
Mark Stultz was employed by Medtronic, Inc. (“Medtronic”), a Minnesota corporation.
7 Stultz was responsible for managing Medtronic’s neurostimulation products. When Stultz was hired in 1995, he signed a non-compete agreement, which provided, “The validity, enforceability, construction and interpretation of this Agreement shall be governed by the laws of the state in which Employee was last employed by Medtronic.” The duration of Sutltz’s employment was in Minnesota.
Stultz left Medtronic and began working for Advanced Bionics Corp. (“ABC”) in Los Angeles and was marketing products that compete with the same products Stultz marketed and sold for Medtronic. On June 7th, 2000, Stultz and ABC sued Medtronic in Los Angeles Superior Court for declaratory relief requesting the court declare Stultz’s non-compete agreement unenforceable. At the time, Stultz was still a Minnesota resident. On June 8th, Stultz and ABC moved the California court for a temporary restraining order to prevent Medtronic from pursing any action to enforce its non-compete agreement. The court scheduled the hearing on the temporary restraining motion for June 9th, which proved enough time for Medtronic to take action.
Medtronic removed the California case to federal court on the basis of diversity jurisdiction, which prevented the hearing on the restraining order. Also, on June 9th, Medtronic filed suit in Minnesota to enforce the non-compete agreement. Medtronic obtained a temporary restraining order from the Minnesota court that enjoined Stultz from working for ABC and prohibited Stultz and ABC from taking any action in any other court that would interfere with the Minnesota action. In the meantime, the federal court remanded the case back to California state court as no grounds for jurisdiction existed. Due to the Minnesota court’s order, Stultz and ABC could not proceed in the California state court.
On August 3, the Minnesota court issued a preliminary injunction that included the prohibitions contained within the temporary restraining order, except it did not restrain Stultz and ABC from pursuing the California litigation. On August 8th, ABC and Stultz obtained an ex parte order from the California court that restrained Medtronic from taking any further proceeding in the Minnesota action.
On August 16th, the Minnesota court amended its August 3 preliminary injunction and included language prohibiting Stultz and ABC from pursuing the California action, except they were ordered to ask the California court to vacate its restraining order on Medtronic with regard to the Minnesota action, which the California court refused to do. After all the legal maneuvering, Medtronic was restrained by the California court from pursuing the action in Minnesota and Stutlz and ABC were restrained by the Minnesota court from pursuing the action in California. Appeals ensued in Minnesota and California and the parties incurred additional legal fees.
The lessons learned from this case are: 1) your choice of law provision may not be given effect; 2) states will protect their own policies and laws when non-compete agreements are concerned; and, 3) file first.
With regard to the file first lesson, only the California court’s one day delay permitted Medtronic to file in Minnesota and only then because Medtronic removed the California case to federal court. Removing a case to federal court is not always an option. Typically, courts follow a “first to file” rule
8 and the jurisdiction in which the first case is filed has jurisdiction. Accordingly, the practice of sending cease and desist letters to former employees who are violating non-compete agreements is not recommended. All this does is put that employee on notice and provide them the opportunity to file first in a jurisdiction that may be more employee-friendly.
If you are an employer, you should not only be concerned about enforcing your own non-compete agreements, but hiring employees subject to non-compete agreements. The cases are legion in which an employer finds itself named as a defendant because it hired an employee subject to a non-compete agreement. In some instances, the new employee is valuable enough that taking the risk of incurring legal fees is worth it, but in some instances, that employee is subject to a non-compete agreement in a jurisdiction whose public policy favors enforcing non-compete agreements. For example, consider the situation of a California employer who wishes to hire an employee who is subject to non-compete with an Ohio choice of law provision. Since Ohio favors non-compete agreements, this is a significant hurdle. If this is an extremely valuable employee, one of the steps the employer could take, much like ABC, is to file a declaratory judgment action in California requesting the Court declare the non-compete agreement void and unenforceable.
A reasonable conclusion to be drawn from this article is that choice of law provisions do not matter as courts will apply whatever law they see fit. Courts application of their own laws is prevalent and diminishes choice of law provisions, but choice of law provisions are the employer’s first defense. You simply must include a choice of law provision in your non-compete agreements in order to provide a court initial guidance as to what law should apply. A court may determine it wishes to apply its own law, but it first must overcome the hurdle of your selected law. As this article demonstrates, not all laws are created equal. Determine what state’s laws could potentially apply based on your company’s contacts with various states, such as state of incorporation, location of principal place of business, and location of the particular employee. Next, determine which state’s laws are most advantageous.
The existence of a choice of law provision may not be enough. If you learn a former employee is violating a non-compete agreement, do not send a cease and desist letter if it is your intention to ultimately file suit. File suit immediately in the jurisdiction favorable to you as the employer, which ideally will be the jurisdiction whose law you designated in the non-compete agreement. Also, immediately move for a temporary restraining order requesting the court restrain the employee from competing, but also request the court restrain the employee and the employee’s current employer from pursuing any action related to the non-compete agreement. This prevents the employee from filing for declaratory relief in a jurisdiction that may not view your non-compete as favorably.
Brian E. Dickerson, Partner at Roetzel & Andress, LPA focuses his practice in the areas of complex litigation. He is a 1996 graduate of the Ohio University Sports Administration Program. Jonathan R. Secrest, Associate at Roetzel & Andress, LPA focuses his practice on assisting clients with employment related matters, including representation through all stages of litigation and before state and federal agencies.
