Home Home About Us Practice Areas Our Attorneys Press & Publications Events Diversity Pro-Bono Careers
FOLLOW US:

2016 Mitigating Risk: Key Litigation Developments

Employment >> Restrictive Covenant Keys: Choice of Law, Forum Selection Provisions

April 5, 2016

Because the law concerning the enforceability of post-employment restrictive covenants varies from state to state, a company’s ability to prevent a former employee from working for a competitor or soliciting the company’s customers or employees often turns on the law governing the agreement. In some states, such as California, non-compete agreements essentially are unenforceable outside the sale-of-business context because of the state’s strong public policy against such agreements. Other states, such as New York, are more willing to enforce post-employment restrictions to the extent they are necessary to protect an employer’s legitimate interests (for example, customer relationships), do not impose undue hardship on the employee, and are not injurious to the public.

Consequently, choice of law is often critical to the enforcement of a restrictive covenant. In 2015, however, New York’s highest court, the Court of Appeals, refused to enforce a choice of law provision in a restrictive covenant agreement because the chosen law offended New York public policy. The court held that Florida law, which the parties had selected in their restrictive covenant agreement, made it too easy to enforce restrictive covenants and found that it was sufficiently “obnoxious” to New York’s public policy to justify disregarding the choice of law provision and, instead, apply New York law.

Although California courts also have refused to honor the parties’ choice of law in non?compete agreements because of California’s public policy against these kinds of agreements, recent decisions suggest that California courts are more willing to enforce forum selection clauses because those clauses are not contrary to California public policy, even if it means sending a case to a jurisdiction that enforces non-compete agreements.

So, for example, although a California court likely would not honor a New York or Florida choice of law provision in a non-competition agreement, it more likely would enforce a New York or Florida forum selection clause, leaving it to the New York or Florida court to determine which state’s law should apply when analyzing the enforceability of the covenant.

Takeaways

  • Because the governing law may be critical to the enforceability of a restrictive covenant agreement, employers should include a choice of law provision in these agreements, selecting a law that has a reasonable relationship to the agreement and that is favorable to enforcement of the covenant.
  • Because courts may not enforce a choice of law provision in a restrictive covenant agreement if the chosen law offends the public policy of the state where that court is located, employers also should include a forum selection provision in the agreement, selecting as the exclusive venue for any dispute the courts in a state that has a reasonable relationship to the agreement and that is willing to enforce restrictive covenants.

Author(s)

NEAL H. KLAUSNER
Partner/Co-Chair
212.468.4992
nklausner@dglaw.com
Litigation