Left to right: Jonathan Longino, Sue Stott and Catherine Grech of Perkins Coie ()
Most states allow employers to reasonably restrict departing employees from working for a competitor. California isn’t one of them. Section 16600 of the California Business and Professions Code forbids noncompete clauses in nearly every circumstance, and California courts have consistently stricken attempts to circumvent the general prohibition. But recent cases show that there may be another way—mandatory forum selection clauses.
Replacing the ‘Race to the Courthouse’ with a Forum Selection Clause
Historically, many multistate employers sought to get around California’s prohibition on noncompete agreements by stating that the noncompete was governed by the law of a state that permitted a noncompete agreement. California courts, however, would ignore these choice of law provisions, as it led to a California court enforcing a restrictive covenant that violated California’s public policy. The result was that many California-based employees would file a declaratory judgment action in California to invalidate the noncompete agreement immediately after leaving their jobs. Out-of-state employers, conversely, were motivated to file first in their home state, hoping to get an earlier judgment in a more favorable forum. These conflicting incentives meant that enforcement of the non-compete depended on who won the race to the courthouse.
Recent case law, however, allows multistate employers to avoid this race to the courthouse while also bypassing California’s prohibition on noncompetes. In several recent cases challenging noncompete agreements under Section 16600, California courts have enforced the forum selection clauses in those agreements, transferring disputes over noncompete agreements to the designated forum state where the home court is more likely to apply local law—which typically favors the multistate employer.
At its most basic, a mandatory forum selection clause is an agreement that any disputes arising out of a contract will be litigated in a particular state, even if the dispute is filed in a different state. Both California and federal law strongly favor forum selection clauses and impose a heavy burden on plaintiffs hoping to evade enforcement. The U.S. Supreme Court recently held that mandatory forum selection clauses must be upheld “in all but the most exceptional cases,” in Atlantic Marine Constr. Co. v. United States Dist. Ct. for the W. Dist. of Texas.
That “exceptional case” is generally limited to circumstances where the clause is manifestly unreasonable or where the clause itself—rather than the effect of the clause—violates a strongly held public policy. The party trying to enforce the clause can overcome this with an affirmative showing that: (1) the employee accepted the forum selection clause freely and voluntarily—even if it is a contract of adhesion; (2) there is some connection to the forum, such as the employer’s state of incorporation or the location of its headquarters; and (3) in litigation between the parties, the plaintiff will not be denied his day in court in the contract forum. (See, e.g., Cal-State Bus. Products & Servs., Inc. v. Ricoh, 12 Cal. App. 4th 1666 ; M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 ; Am. Online, Inc. v. Super. Ct., 90 Cal. App. 4th 1 ). The reviewing court does not consider the plaintiff’s preference or convenience.
Courts Analyze the Selected Forum Separately from the Chosen Law
Very significantly, a reviewing court examines the clause in isolation, ignoring the effect of its enforcement. For instance, in Hartstein v. Rembrandt IP Solutions, LLC, an employer moved to enforce a forum selection clause that would transfer a dispute over a non-compete agreement out of California to a state that permitted employee noncompetes. The former employee appealed to California’s public policy against restrictive covenant, noting that enforcement of the forum selection clause would likely result in a non-California court enforcing a noncompete agreement against a California employee. The court, however, noted that the “problem with Plaintiff’s argument is that it does not challenge the reasonableness of the forum selection clause itself, only the reasonableness of its effect.” The court refused to speculate about how a court in the designated forum might rule or whether “the potential outcome of the litigation on the merits in the transferee forum” might conflict with California policies. Instead, the court analyzed only whether forum selection clause itself violated California law or policy, and found that it did not.
Most of the case law on forum selection clauses comes from federal courts in California. California state courts have also enforced forum selection clauses in noncompete agreements, but their rulings and analysis are less consistent. (See, e.g., Troisi v. Cannon Equip. Co., No. G042084 [Cal. Ct. App. May 25, 2010]; Caporicci v. AMN Healthcare, Inc., No. 30-2013-00679545 [Cal. Super. Jan. 23, 2014]; Verdugo v. Alliantgroup, L.P., 237 Cal. App. 4th 141 ; but see Bullard v. Anaqua, Inc., No. RG14725925 [Cal. Super. April 22, 2015]) Because California state courts lack the breadth of supporting authority available in federal court, out-of-state employers may benefit from first removing the state action to federal court and then seeking to enforce the forum selection clause.
Impact of Successfully Enforcing a Forum Selection Clause
In the noncompete context, a mandatory forum selection clause draws its power from the general—albeit unwritten—rule that courts will favor their own state’s law, especially when faced with a choice of law provision that dictates use of that state’s law. Once the case is transferred, the chosen forum state often decides to follow its own law and enforce the restrictive covenant. Courts in New York, Pennsylvania, Massachusetts, Michigan, Oregon, Washington and Kansas have upheld choice of law clauses and applied their own law favoring noncompete agreements to bind California-based employees with a noncompete agreement.
Not all states, however, have been so favorable to their home-state employers. Courts in Delaware, Illinois, Ohio and Texas have concluded that, at least under certain circumstances, California law may prevail over the choice of law clause in an employment agreement with a California-based employee.
A Few Cautionary Notes
Before rushing to enforce an otherwise unenforceable noncompete, employers of California residents should remember a few cautionary notes. First, the rule of reason in noncompetes still applies. Even if the dispute is transferred to an out-of-state court, it will still need to meet the forum state’s rules regarding noncompete agreements. These rules vary widely from state-to-state, but generally require a reasonable scope and duration. Keeping the restriction narrow will increase the odds of enforcement.
Second, remember to include a choice of law provision. It would do no good to get to the forum state only to have that state apply California law because the contract did not state what law would apply.
Finally, make sure there is a reasonable connection to the forum state. Without that reasonable connection, a court will not transfer the case.