Section 16600 of the California Business & Professions Code expressly states that any contract that restrains a person from engaging in lawful business of any kind is void.
Accordingly, non-compete provisions in employment contracts are strongly disfavored in California. Historically, this has affected out-of-state employers who employ Californian individuals. To circumvent California’s strict prohibition on restrictive covenants, out-of-state employers have included choice-of-law provisions so that a court is restrained from having to interpret the non-compete provision under California law, even if the employee is from California. However, in 2015, a Delaware court concluded that choice-of-law provisions for a Delaware LLC would violate California’s “fundamental policy” prohibiting restrictive covenants. Ascension Ins. Holdings, LLC v. Underwood, No. CV 9897-VCG, 2015 WL 356002 (Del. Ch. Jan. 28, 2015). This decision left out-of-state employers with little opportunity to work-around California’s statute for its Californian workers.
However, late this year the same Delaware Court found that California’s policy against non-competes is not so “fundamental” in a situation where the Californian employee was represented by counsel and knowingly negotiated away his or her protections under § 16600. NuVasive, Inc. v. Miles, No. CV 2017-0720-SG, 2018 WL 4677607 (Del. Ch. Sept. 28, 2018). In that case, the plaintiff NuVasive, Inc., a Delaware corporation, sought to enforce an employment agreement containing non-compete and Delaware choice-of-law and forum provisions against its Vice-Chairman, and one of its Californian employees, Patrick Miles. Miles resigned from NuVasive and began working for one of its competitors. After NuVasive brought suit against him under their employment contract, Miles moved for partial summary judgment, arguing that the restrictive covenants in the contract were unenforceable under California law, which he argued was the appropriate law that the Court should interpret because under Ascension, the court must balance the public policies of the states involved. However, despite its precedent in Ascension Ins. Holdings, LLC, the Court concluded that enforcing Delaware law would not violate fundamental California policy.
The reason for this switch between the Court’s two decisions was the intervening implementation of Cal. Labor Law § 925 in 2017, which states that an employer cannot require an employee who primarily resides and works in California to agree to deprive himself or herself from the protection of California law, unless the employee was individually represented by legal counsel in negotiating the terms of the agreement that included the choice-of-law provision. Consequently, the NuVasive Court found that enforcing Delaware law, which allows restrictive covenants, would not offend fundamental California policy. The Court’s analysis assumed Miles was represented by counsel when he agreed to a Delaware choice of law provision. The court reasoned that although California has a fundamental public policy against non-compete provisions, by passing Section 925, the California legislature made a policy decision that “when contracting parties’ rights are protected by representation, freedom of contract trumps this interest.” NuVasive, 2018 WL 4677607, at *5. The Court concluded such even though the parties entered into the contract before California’s passage of Section 925, because the Court determined that it must examine the law as it currently exists. Accordingly, the Court denied Miles’s motion for partial summary judgment.
Section 925 and the Delaware Court’s interpretation of it in the context of restrictive covenants reminds employers that it is important to consider their choice-of-law and venue provisions carefully, particularly for the enforcement as to California employees, and employees in jurisdictions with similarly less-than-favorable non-compete laws. For those employees for whom post-employment enforcement is important, employers may consider providing counsel to negotiate and review the employee’s contract.