Quirky Question # 195:

Our company does business in all 50 states. To the greatest extent possible, we like to have uniform employment policies for our employees, wherever they may be located. As you know, this goal is frustrated somewhat by the differences among state employment laws.

We have been considering using a standard employment agreement for all of our exempt employees. Our plan is to include a choice of law provision identifying Minnesota as the state whose law applies. We also want to make Hennepin County our choice of venue. It strikes us that the inconvenience of litigating in Minnesota may deter some disgruntled ex-employee from bringing suit. Will this approach fly? We’d appreciate any guidance you can provide.

Roy’s Analysis of Quirky Question # 195:

Many national employers would echo the sentiments you expressed. The differences among state employment laws – indeed, the conflicts among state employment laws – create a challenge for employers with employees in all or nearly all states. Employers like your company understandably would like to adopt uniform policies, applicable to all of their employees, regardless of where the employees are located. Again, however, the differences in state employment laws make this approach difficult.

For example, nearly every employer generally represents (and repeatedly reminds) its employees that they are employed “at will,” i.e., the notion that the employer may terminate the employment relationship with or without notice, with or without cause, at any time, for any reason not prohibited by law. Montana, however, has a statutory scheme that repudiates this fundamental employment principle. (See my previous post on this issue, Quirky Question # 114, addressing Montana’s statute).

Another, even more common area of conflict among state laws exists with respect to post-employment restrictive covenants. As I have described in other Blog analyses, some states grudgingly accept post-employment restrictive covenants (such as non-competition agreements and non-solicitation agreements), and some accept them enthusiastically, while other states (think, California) repudiate these agreements except in extraordinarily limited circumstances. Still other states (about 17 at last count) regulate restrictive covenants through statute.

Given these substantive differences and conflicts among state laws, many companies address this issue by adopting the approach you have advocated. They include choice of law provisions in the employment contracts they utilize with their employees. For those of you unfamiliar with this concept, a choice of law provision is simply a provision in an agreement stating the agreement will be interpreted in accordance with the law of a particular state. Some courts accept them; others view them more skeptically, particularly if they appear to be included as a way of circumventing a state’s laws that are more advantageous to the employees covered by the contract.

In addition to a choice of law provision, some companies include a choice of venue paragraph in their employment agreements. Again, for the uninitiated, these provisions simply state that if a dispute arises regarding the terms and conditions of the employment agreement, the dispute must be resolved in a particular location (or venue). Often, it is defined as the federal or state courts of a particular state; occasionally, it includes the identification of a particular county, typically where the company is headquartered.

You ask whether this approach “will fly.” My equivocal answer is sometimes yes, sometimes no. This depends in part on who gets to the courthouse first.

The race to the courthouse is illustrated by a recent decision from the federal District Court for the District of Minnesota, St. Jude Medical, S.C., Inc. v. Biosense Webster, et al., Civil File No. 12-621 (May 4, 2012). (Perhaps unsurprisingly, given the dollars at stake, there is considerable litigation regarding the movement of employees from one company to another in the medical device industry.)

As the District Court pointed out in the St. Jude decision, St. Jude and Biosense Webster (a division of Johnson & Johnson) are direct competitors and have litigated a number of non-compete disputes in various jurisdictions around the country. The employee in the St. Jude case was Jose de Castro, who was also named as a defendant.

Castro lived and worked in California. He started with St. Jude as a Senior Field Engineer in 2006, entering into a “Term of Years Agreement” (TOY Agreement) at the commencement of his employment. As the name implies, the TOY Agreement requires employees to work for a specified duration, typically two or three years.  Castro was promoted by St. Jude in 2009, at which time he entered into a new TOY Agreement, this one for two years. In January 2011, St. Jude and Castro negotiated a third TOY Agreement, this one for three more years of employment.

St. Jude used a choice of law provision in the TOY Agreement, stating that Minnesota law applied “without giving effect to the principles of conflict of laws of any jurisdiction.” St. Jude, as you are planning, also had a choice of forum provision in the TOY Agreement, which identified the appropriate forum as the state or federal courts of Ramsey County (the county in which St. Paul, MN is located, and where St. Jude is headquartered).

Castro resigned on March 6, 2012, approximately two years before his employment term would have expired. Castro emailed his resignation to St. Jude, (in my view, somewhat of a wimpy way to end a six-year employment relationship). St. Jude responded immediately, advising Castro that it did not accept his resignation and that it expected him to fulfill his promise to continue working until his contract expired.

On the same day he resigned, Castro and his new employer, Biosense Webster, filed a lawsuit in California state court seeking a declaratory judgment (i.e., a determination from the CA court) that the contract was unenforceable. On March 9, just three days later, St. Jude filed its own lawsuit in federal court in MN. St. Jude requested the Minnesota court to enjoin the CA lawsuit from proceeding.  St. Jude also removed the CA case from state court to federal court, with the consequence that both lawsuits were venued in federal district courts.

There are a number of interesting aspects to the decision, many of which bear upon the issues you have raised.

First, as the judge in the MN action pointed out, actions to enjoin another court from proceeding with a lawsuit are not evaluated by the same standards that typically are involved when determining whether injunctive relief is appropriate. Rather, as the Court noted, actions designed to prevent a party from moving forward with a duplicative lawsuit (both actions, whether in CA or MN ultimately will be making a determination on the validity of the TOY Agreement) are judged by the “first-filed” rule. In other words, who got to the courthouse first.

Second, however, the judge emphasized that the first-filed rule is not “rigid, mechanical or inflexible.” There may be circumstances where the facts of the case warrant a different response. These “red flags” may demonstrate “compelling circumstances” that would justify disregarding the first-filed rule. The red flags could include: a) the first filer (here, Castro) knows that the second filer (here, St. Jude) was considering filing a lawsuit imminently; b) the first filer (Castro) filed a preemptive action (i.e., a declaratory judgment action); and c) the first filer (Castro) had not experienced any actual harm – his damages were speculative at the time his suit was initiated.

Third, the court examined the precise question you posed – is the TOY Agreement’s forum selection clause enforceable? The court noted that generally, these types of provisions ARE enforceable, unless they are a product of fraud or constitute overreaching by the employer. Interestingly, the court found that the TOY clause in question “is not the product of unequal bargaining power.” In reaching this conclusion, the judge observed that Castro was a highly educated, highly paid professional, who had renegotiated and extended his TOY Agreement several times. (I understand the Court’s conclusion but even for a highly educated employee, particularly someone without legal training, it would be difficult to fully understand the ramifications of a somewhat obscure choice of law provision in a lengthy employment contract. It would be harder still to negotiate with a company to modify that provision.)

Fourth, the court also explored the second question you asked about – are choice of venue provisions enforceable? You will be pleased to learn that the court concluded this provision was enforceable. In response to Castro’s argument that it would be inconvenient for him, as a California resident, to participate in a legal proceeding in Minnesota, the court observed, “the presumption is that consideration was received at the time of the contracting for the alleged inconvenience.” Really? I’ve been involved in a lot of contract negotiations, for both employers and employees alike. I don’t ever recall an employee insisting that he/she deserved greater compensation or other benefits because, in the event a dispute arose, the choice of forum clause would require him/her to travel to another state to resolve the dispute. Nevertheless, that was the court’s determination; the choice of forum clause was upheld.

Fifth, the court also addressed the question of whether Biosense Webster should be bound by the choice of law and choice of forum provisions in the TOY Agreement. Keep in mind that Biosense Webster had never signed the Agreement with St. Jude. Despite that fact, the court concluded that Biosense was bound by the contract provisions because it was so closely related to the dispute that it was foreseeable it would be bound. Biosense Webster had hired Castro. Biosense Webster and St. Jude had litigated this same issue previously with other employees. And, Biosense Webster and Castro had filed suit jointly in the CA courts.

Finally, when considering all of the points above, and examining the specific facts of the case, the Court concluded that the compelling circumstances of the case warranted deviation from the first-filed rule. So, given that fact, do you think the MN federal court enjoined the CA federal court from proceeding to resolve the first-filed lawsuit? While that would be a logical conclusion, that was not the outcome.

Despite stating, “Due to these compelling circumstances, the first filed rule does not apply to this action and MN, not CA, is the proper venue for this case,” the Court decided NOT to enjoin the action in CA. The Court stated, “This Court will not enjoin the California proceeding in its sister court so that the federal court in CA can make the ‘compelling circumstances’ determination.”

Hmmm. I thought the MN Court just made that “determination.” Apparently not. Apparently, this analysis was more in the line of an “advisory opinion.” Clearly, the judge in MN felt strongly about this fact pattern. But, ultimately, the judge decided that this was not her call to make. It is up to the court where the first-filed action was filed to decide the preliminary jurisdictional issue. Whether the federal court in CA will analyze the issues in the same way remains to be seen.

Let me offer four quick practical pointers that can be derived from this case and that may guide how you wish to approach the issues you have raised:

  • the choice of law and choice of forum provisions should be written in clear, understandable language (not legalese); they should be set out in distinct paragraphs;
  • if a dispute subsequently arises between your company and a future employer of one of your employees, you may be able to bind the future employer to your contract terms;
  • you should take steps to apprise (immediately) a departing employee and his/her future employer that a lawsuit is imminent if they do not alter their course of behavior; and
  • you have to accept the fact that even if all of the equities are in your favor, as between federal sister courts, the court where the first filed action was commenced will get to make the determination as to whether your choice of law and choice of forum provisions are enforceable.

It will be interesting to see how this dispute is resolved in the CA court. Will the court adopt the same analysis advanced by its sister court in MN? Or, will the CA court conclude that California’s repudiation of post-employment restrictive covenants (both legislatively and judicially), and the principle of employee mobility that repudiation represents, also should apply to an agreement that requires an employee to continue working for an employer throughout the duration of the term (roughly two more years) for which he/she contracted.  A separate question, of course, is whether an employer would want an employee who has tried to resign to continue working.  I have serious doubts about the prudence of that prospect.