Merritt, Hawkins & Associates, LLC v. Caporicci

Dallas Court of Appeals, No. 05-15-00851-CV (May 2, 2016)

Justices Bridges, Francis (Opinion), and Myers

This permissive appeal considered whether California law governed contract and tort claims against California-based former employees who signed employment agreements containing a choice-of-law clause stating that Texas substantive law would apply. Applying the applicable provisions of the Restatement (2d) of Conflicts, the Dallas Court of Appeals affirmed the trial court’s ruling that California law would apply to the claims for breach of the non-competition provision and related tort claims, because of California’s more significant relationship to the dispute and because application of Texas law would contravene a fundamental policy of California.

Caporicci and Cummins were healthcare-personnel recruiters based in Orange County, California for MHA, a California company with its principal place of business in Irving, Texas. Both signed employment agreements with noncompetition provisions stating that “[t]his agreement shall be governed and construed in accordance with the substantive laws of the State of Texas.” After resigning, Caporicci and Cummins founded a competing company in Orange County, California, and began soliciting customers of MHA. In a lawsuit filed in Dallas County, MHA sought to enforce the choice-of-law clause and to apply Texas law to their claims under the contracts and in tort. The trial court took judicial notice that California law applied, but granted MHA permission to file this appeal.

The appeals court applied § 187(2) of the Restatement (2d) of Conflict of Laws to determine whether to enforce the parties’ contractual selection of Texas law. Under the Restatement, the law chosen by the parties applies unless either (a) the chosen state has no substantial relationship to the parties or (2) the application of the law chosen would be contrary to a fundamental policy of a state which has a materially greater interest that would apply in the absence of the parties’ contractual agreement.

There was no dispute that Texas had a substantial relationship to the parties. Therefore, the Court weighed whether: (1) California had a more significant relationship to the transaction, (2) California had a materially greater interest in the determination of the particular issue, and (3) the application of Texas law was contrary to a fundamental policy of California. The Court found all in the affirmative.

The former employees were based in California and recruited physicians there. None of the hospital groups they recruited were in Texas. Although both did travel at times to Texas for meetings and receptions, they did not perform their daily obligations in Texas. In short, the “gist” of their work under the employment agreements was performed in California where they were located. In addition, California had a greater interest in determining whether the non-competition provisions were enforceable. Caporicci and Cummins had formed their new business in California, and MHA had recently shut down its operations there. Moreover, the application of Texas law regarding the enforcement of the non-competes was contrary to California law that prevents contractual restriction on open competition and employee mobility.

In addition to finding California law applied to the enforcement of the non-competition provisions, the Court also held that California law should govern MHA’s statutory and tort claims. Pursuant to §§ 6 and 145 of the Restatement (2d) of Conflicts, the Court applied the “most significant relationship” test to analyze the qualitative nature of the contacts with the states. All the claims stemmed from the alleged misappropriation of information and competition by Caporicci and Cummins in California. Therefore, California had the most significant relationship to the parties and the dispute, and thus California law governed the claims.