As employment lawyers based in California are well aware that post-employment non-compete agreements are generally void as a matter of law in this state. Further, there is precedent for awarding punitive damages and disgorgement of profits where employers have knowingly required employees to enter into invalid agreements. Also, the DOL has actively pursued California-based companies engaging in anti-competitive practices when it comes to talent.
Against that backdrop, however, employers need not “throw in the towel” completely when it comes to post-termination restrictive covenants as there are a few narrow scenarios that allow for enforceable post-termination non-competes in California in the right circumstances, and a potential new take on an old strategy to consider.
Narrow Statutory Exceptions to Non-Competition Clauses
As has long been the case, the California Business and Professions Code enumerates several exceptions to the general prohibition against non-compete agreements, including permitting non-compete provisions in connection with the merger or sale of a business in certain instances or upon (or in anticipation of) a dissolution of or the termination of interest in a limited liability company or partnership provided that certain strict legal requirements are met.
Negotiating A Forum Selection Clause Or Choice of Law Provision With A Represented Employee
The enforceability of non-compete agreements depends primarily on state law. With California’s aversion to post-termination non-competes, employers have often queried whether they can escape California law and courts by opting for a non-California choice of law and forum. This approach historically has always been an uphill battle, resulting in a proverbial race to the courthouse with no guaranteed outcome, but California Labor Code Section 925 appears to offer a new take on this old strategy.
By way of background, under California Labor Code Section 925 (effective January 1, 2017), an employer cannot require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision with a foreign choice of law or forum unless the employee is individually represented by counsel in negotiating the terms of the agreement. Put differently, Section 925 seemingly empowers employers to include forum selection clauses and/or choice of law provisions in contracts with California employees when an employee is individually represented by counsel during negotiation of the contract. As such, it is plausible that employers can use choice of law and choice of forum provisions with represented employees as a means to contract around California’s laws against non-competes. Though no California state court has substantively opined on this issue in a published opinion yet, a recent case out of Delaware (Nuvasive, Inc. v. Miles) illustrates how this approach might work as a legal strategy.
- In September 2018, the Delaware Court of Chancery enforced a Delaware choice of law provision in an employment agreement between a Delaware corporation doing business in California and a California resident working in California.
- The company filed suit against the employee in Delaware for violating the non-compete in his employment agreement. The employee fought back, filing a Motion for Partial Summary Judgment on the grounds that the non-compete was unenforceable under California law.
- The court denied the motion, upholding the choice of law provision and ruling that Delaware law applied to the contract. (Delaware, in contrast to California, enforces reasonable covenants not to compete.)
- In its analysis, the court reasoned that the California legislature intentionally included a pertinent carve-out in Section 925 balancing the state’s interest in enforcement of its labor law with the additional interest in freedom of contract.
- The Delaware court concluded:
[California] has recognized that in the limited subset of cases where the inequality of bargaining strength of the parties to an employment contract is buffered by the employee being represented by independent counsel, and where counsel participated in negotiation of the terms of the choice of law provision, California’s interest in freedom of contract outweighs interest in freedom of employment.
In the past, California employees have tried to avoid outcomes like the one in Nuvasive by either requesting that the California court enjoin the foreign litigation or seeking declaratory judgement in a California court. To date, such efforts have not been successful because (1) California courts are generally reluctant to enjoin litigants from pursuing claims or defenses in foreign courts, even where California public policies are at stake, and (2) California district courts exercising diversity jurisdiction have been willing to remove cases to foreign courts on the basis of the foreign choice of forum and law.
So, while there may be some hope on the horizon for California employers looking for a way to obtain an effective post-termination non-compete, the exceptions are narrow, fact-specific and practically limited to those former employees who are represented by counsel. Nonetheless, for high-level employees represented by counsel, particularly in the M&A context, California law may actually provide a new approach to the dilemma of viable post-termination non-competes.