As in real estate, as in law. A recent ruling in the USDC for the District of Colorado demonstrates that procedural considerations of where to file may often have substantive consequences. Plaintiff LS3, Inc. (“LS3”) sued Cherokee Federal Solutions, LLC (“CFS”) and various former employees of LS3 in the United States District Court for the District of Colorado. The gist of the action was that CFS, a competitor of LS3, solicited away former employees of LS3 to work for CFS in violation of employee non-compete agreements. Claims were asserted against the individual employees for breach of the restrictive covenant agreements and against CFS for tortious interference with those same agreements. Critically, the agreements at issue all contained Maryland choice-of-law provisions but apparently no venue or forum provisions.
Importantly, the restrictive covenants at issue were enforceable under Maryland law, but not under Colorado law. Unfortunately for LS3, the court disregarded the Maryland choice-of-law provision because enforcement of the restrictive covenants would violate a fundamental policy of Colorado and because Colorado had a “materially greater” interest in the litigation because all but one of the individual employee defendants was a citizen of Colorado. On the other hand, the only connection to Maryland was LS3’s state of incorporation. The application of Colorado law was fatal to LS3’s claims and the court dismissed LS3’s lawsuit in its entirety with prejudice.
Using a universal choice-of-law provision brings benefits to an employer: administration of a single agreement is easier to manage, uniform application of law to the agreement brings predictability to legal outcomes, and complying with one state’s law is substantially easier than complying with the laws of multiple states. To best effectuate these benefits, employers should also consider using a mandatory (or exclusive) jurisdiction and venue provision requiring that all litigation arising out of or relating to the employment agreement be brought in a single jurisdiction. As we’ve previously discussed, contracts providing for exclusive jurisdiction and venue bear a strong presumption of enforceability under the Supreme Court case Atlantic Marine and its progeny. Applied to the facts of the LS3 case, if LS3 had sued in Maryland, a court sitting in Maryland would be substantially more likely to apply Maryland law and LS3 would have born a greater likelihood of succeeding on the merits of its claims.
For multi-state employers, however, caution must still be taken with the use of foreign choice-of-law and venue provisions. California, Washington and other states have recently prohibited and penalized the use of such provisions with their employees. Thus, while universal choice-of-law and venue provisions provide a useful tool, employers should confer with legal counsel to identify states in which employers may operate that prohibit the use of such provisions.