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Healthy Rivalries Part 2: Choice of Law Provisions in NonCompete and Anti-Solicitation Agreements

February 27, 2014

 

I had good responses to my previous post about noncompetes, some of which asked me to fill in the blank I intentionally left: What happens when there's a "choice of law" provision in the noncompete or anti-solicitation agreement? Will the agreement be enforced?

This gets very complicated, so it's best to start off with an understanding of what a "choice of law" provision is.

Every state has its own set of laws. The laws of one state may be quite different from the laws of another. When two parties sign a contract, it will usually be interpreted under the law of the state where the contract was formed.

When signing a contract, though, the parties can agree that a different state's laws will apply. Usually, the different state will have some connection to one of the parties. So if party A, for example, is a California worker, and party B is a Minnesota employer, the parties could include a "choice of law" provision in the employment contract that it will be interpreted under Minnesota law.

So here's the issue: what happens when the contract is with an employee in California, where covenants not to compete are illegal, but includes a choice of law provision to be interpreted under the laws of Minnesota, where they are legal?

The answer as to whether it will be legal or not depends on who gets a judgment from a court of law first.

California has declared that its policy against noncompetes and anti-solicitation agreements is so strong that it won't enforce one *even when there's a choice of law provision applying another state's laws.* In other words, if the contract with a noncompete stating that is will be interpreted under Minnesota law is brought in a California court, it will still be found to be illegal.

There's a catch, however. Let's say the employer brings a lawsuit in Minnesota, asking the court to prevent the employee from working for a competitor and to enforce its noncompete. Minnesota will honor such a noncompete (if it complies with the "rule of reasonableness" that I discussed in my last post), and issue such an order.

Now, if Minnesota enters its order *before* a California court can enter its order, California *will honor the Minnesota ruling* and require the employee to follow it. This is called the "rule of comity," in which one state will honor the rulings of a sister state, even if the one state would not have come to the same conclusion.

In other words, California has established the need for a race to judgment when it comes to noncompetes and anti-solicitation agreements. California has decided that whoever gets their judgment first wins.

This is bad policy, because it actually encourages people and companies to sue each other. I've even been in the position of telling employees that they might have to consider a preemptive lawsuit when these issues have come up. Nonetheless, this is the current state of the law in California.

Conflicts among state's laws often create challenging legal problems and bizarre results. This is an example, and California's solution creates a lot of practical difficulties.

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