When it comes to the principle of freedom to enter into contracts, “freedom’s just another word” for “as long as you don’t bump up against a more important legal principle.” Indeed, the “freedom of contract is a qualified and not an absolute right.” Chicago, Burlington & Quincy R.R. Co. v. McGuire, 219 U.S. 549, 567 (1911).
Choice-of-law provisions are where freedom to contract may well bump up against another principle. Courts generally respect the parties’ agreement about which state’s law will govern the contract. But in employment agreements, where courts may be concerned about unequal bargaining power, courts may require that the chosen state has a relationship to the parties and that the laws of the foreign state do not violate the public policies of the forum state.
This tension rippled through a recent choice-of-law decision by the Court of Appeals of New York, the state’s highest court, affecting how employers may be able to use a Florida choice-of-law clause in agreements with employees working outside of Florida In Brown & Brown, Inc. v. Johnson, 25 N.Y.3d 364 (2015) the employee worked in New York as an underwriter and actuary for a New York subsidiary of a Florida parent. She had an employment agreement with a two-year non-compete, governed by Florida law.
It’s no secret that Florida’s statute governing covenants not to compete is employer-friendlier than the law of many other states. The statute expressly provides that “courts shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking employment.” “Shall construe…in favor of providing reasonable protection” looks pretty good to most employers.
The mechanics of the Florida statute also favor employers. For instance, an employer seeking to enforce a restrictive covenant can establish a prima facie case merely by showing that the restraint is necessary to protect a legitimate business interest. This may include trade secrets, valuable confidential business information, substantial relationships with existing customers, customer goodwill, and extraordinary or specialized training. Once the employer establishes a prima facie case, the burden shifts to the employee to prove that the restraint is overbroad, overlong, or unnecessary.
There’s nothing “mere” about the burden New York imposes. As Brown reiterates, New York requires employers to prove that a restraint is reasonable because it (i) is no greater than required for the protection of the employer; (ii) does not impose undue hardship on the employee; and (iii) is not injurious to the public.
It is no mystery, then, why employers with some relationship to Florida may be tempted to include a Florida choice-of-law clause in employment agreements for non-Florida employees. But it should also be no mystery that non-Florida courts may look askance at the choice. In Brown the court determined that “Florida’s nearly-exclusive focus on the employer’s interests, prohibition on narrowly construing restrictive covenants, and refusal to consider the harm to the employee” are in stark contrast to the public policy of New York, which favors strictly construing restrictive covenants in order to protect the ability of employees to pursue a livelihood. The New York court declined to enforce the agreement’s choice-of-law provision because it found that Florida law “would be offensive to a fundamental public policy of [New York].”
Employers take note. Brown is important because it is now unlikely that a New York court will enforce a Florida choice-of-law clause in connection with a covenant not to compete. Employers currently using such clauses in employment agreements with their New York employees should consider modifying those agreements so that New York law, or the law of some other state that is consistent with New York’s public policy, governs.
Employers who use a Florida choice-of-law clause in agreements with employees working outside of Florida may face a challenge. Many states share New York’s public policy disfavoring non-competes. Employees (and their lawyers) in those states may try to apply a Brown argument to invalidate the choice of the “offensive” Florida non-compete statute.
Image courtesy of New York Law Journal, August 31, 2015