Sarah Tishler’s article about California’s latest effort to stamp out noncompete restrictions for its residents was published by Law360 under the title, “Calif. Law Tests Noncompete Prohibitions’ Potential Reach.”
The article, reprinted in full below, analyzes California’s new law expanding the scope of their restrictive covenant ban.
s increasing numbers of states enact laws to protect employees within their boundaries, the question of the reach of those laws — namely, the extent to which they will be enforced in other jurisdictions — is simultaneously becoming increasingly important and increasingly fractured.
Many states have tried to bolster protections for workers through laws that prevent employers from contracting around statutory limitations on post-employment restrictive covenants — in particular, preventing employers from requiring employees to adopt the law of a less protective state as the governing law for an employment agreement containing post-employment restrictive covenants.
There are nine states that have adopted these types of laws: California, Colorado, Louisiana, Massachusetts, Minnesota, Montana, North Dakota, Texas, and Washington.
Michigan appears ready to become the tenth with H.B. 4399, legislation regulating post-employment restrictive covenants, which provides: “All of the following are void and unenforceable: … A choice of law provision in an agreement, to the extent that it would negate the requirements of this section.”
The most recent update to this trend is California’s addition to its Business and Professions Code, Section 16600.5, which was signed into law by Gov. Gavin Newsom on Sept. 1, and takes effect Jan. 1, 2024.
Section 16600 codifies California’s well-known policy prohibiting employee noncompetes: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
The new Section 16600.5 states, in relevant part:
- Any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.
- An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.
here can be no question about the intent of the legislation. The Legislature’s findings in support of the law states in part: “The California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.”
It is clear that California wants no ambiguity surrounding the reach of its restrictive covenant laws — if the employee resides in California, during or after signing a contract containing a provision that violates Section 16600, then California wants to ensure that there is no way the employer can enforce the provision in question.
In other words, it wants every California resident to live, or arrive, in the state free and clear of restraints on their employment.
This legislation has the potential to upend the usual considerations taken into account when negotiating an employment agreement with restrictive covenants. As it stands, many employers include forum selection and governing law clauses in their employment agreements, in an effort to maintain uniformity across their operations.
Up to now, that approach has generally found success in overcoming employees’ attempts at seeking statutory protection under laws like California Labor Code, Section 925, which provides as follows:
- An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
- Require the employee to adjudicate outside of California a claim arising in California.
- Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
- Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.
The substantive legislative intent of Section 925, therefore, is to ensure that California workers enjoy the benefit of Section 16600 regardless of what their contracts say, but that strategy has had mixed results in the courts.
For example, in Ronnoco Coffee LLC v. Castagna, a 2021 decision by the U.S. District Court for the Eastern District of Missouri, one of the defendants was employed by the plaintiff as a territory sales manager in Los Angeles.
The agreement the California defendant signed prohibited him from working for a competitor during and for two years after his employment; prohibited him from soliciting the plaintiff’s employees, clients and customers; and prohibited him from disclosing any confidential and proprietary information.
The agreement also specified that Missouri law governed the agreement and provided for jurisdiction and venue in that forum.
Shortly after signing the agreement, the defendant resigned and began employment with a direct competitor. On a motion to dismiss, the defendant specifically argued that as a California resident, Section 925 of the California Labor Code voided the agreement’s jurisdiction and venue provisions, and argued that California law should apply under conflict of law principles, voiding the restrictive covenants as well.
Rejecting these arguments, the court noted that “district courts outside of California considering choice of law provisions and forum selection clauses have refused to apply § 925 when another state’s law has been chosen by the parties.”
Following the enactment of Section 16600.5, the stakes seem even higher. Now it will not only be California employees attempting to avail themselves of the protections of California’s competition law. It has significantly increased the potential for employees from other states to relocate to California to seek the benefits of Section 16600.5.
Take the hypothetical of a New York company that employs a New York resident. The parties enter into an employment agreement containing a post-employment noncompete, with a choice of law clause selecting New York, and a forum selection clause also selecting New York courts.
The employee resigns, moves to California, and starts working for a direct competitor. The employer wants relief. What can it do?
- Could the employer sue the former employee in California for breach of the noncompete? This seems like it has a high probability of failure given the explicit language of Section 16600.5; it is even more certain than in the past that a California court would void the noncompete.
- Could the employer sue the former employee in New York? This seems more promising given New York’s jurisprudence on forum selection clauses. Note that the employer would also have to establish personal jurisdiction over the employee, which is likely, but not necessarily guaranteed despite the existence of the forum selection clause.
- Could the employer sue the new employer in California under a theory of tortious interference with contract? It seems likely that a California court would hold that there could be no tortious interference with an invalid contractual provision.
- Could the employer sue the new employer in New York? Establishing personal jurisdiction over a California company with, for argument’s sake, no business in New York would be an uphill battle.
Along with these strategic issues, foundational constitutional questions regarding how other states should treat legislation such as California’s have simultaneously come to the fore.
Earlier this year, a petition to review a decision of the U.S. Court of Appeals for the Eighth Circuit was brought before the U.S. Supreme Court, captioned Traffic Tech Inc. v. C.H. Robinson Worldwide Inc.
In Traffic Tech, five individual defendants, all California citizens, signed employment agreements with C.H. Robinson — a transportation and logistics giant — containing post- employment restrictive covenants, and a choice of law clause selecting Minnesota as the governing law of the agreements.
The restrictive covenants at issue were indisputably illegal under California law, and legal under Minnesota law. Each of the individual defendants resigned from C.H. Robinson, began employment for a competitor, and continued to live and work exclusively in the state of California.
C.H. Robinson sued the individual defendants first in Minnesota state court for breach of contract — specifically, breach of the customer nonsolicitation provision — and the defendants removed the case to the U.S. District Court for the District of Minnesota.
n summary judgment, the defendants argued that the district court should apply California law to the dispute, rendering the restrictive covenants void and unenforceable. After the district court granted summary judgment, C.H. Robinson appealed to the Eighth Circuit, arguing that the district court erred by not applying the usual choice of law test under Minnesota law.
The Eighth Circuit ruled that “Minnesota is committed to the rule that parties can agree on the law that governs their contract … a contractual choice-of-law provision will govern … so long as the parties acted in good faith and without an intent to evade the law,” reversing the district court and determining that Minnesota law applied, without consideration of the impact of California’s laws.
The defendants’ petition for a writ of certiorari side steps the usual choice of law analysis, and goes straight to the question of “the constitutional limitations of the Full Faith and Credit Clause and the Due Process Clause, specifically as it relates to a State’s ability to disregard unwaivable rights of the citizens of another State.”
The petition states: “This Court has not yet set forth how a State should address an applicable Anti-Waiver Statute of a sister State, such as Cal. Labor Code § 925.” It goes on to summarize the “patchwork of conflicting case law” that has grown on this subject without clear guidance from the Supreme Court.
Importantly for California and other states with similar statutes, the petitioners argue that Minnesota’s choice-of-law test, as applied by the Eighth Circuit, is unconstitutional because it exhibits a policy of hostility to the public acts of its sister state, violating the full faith and credit and due process clauses of the Constitution.
However, this is not the end of the story for California’s legislation, specifically the new Section 16600.5. As the petition notes, the court’s existing jurisprudence on the full faith and credit clause and the due process clause with respect to conflicts of law requires that “for a State’s substantive law to be selected in a constitutionally permissible manner, that State must have a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair.”
The petition also cites former Justice John Paul Stevens’ 1981 concurrence in Allstate Insurance Co. v. Hague, in which he wrote, “A choice — of — law decision that frustrates the justifiable expectations of the parties can be fundamentally unfair. This desire to prevent unfair surprise to a litigant has been the central concern in this Court’s review of choice — of — law decisions under the Due Process Clause.”
It is difficult to square that precedent, which has not been abrogated since, with the explicit statutory command of Section 16600.5 to disregard where a given contract was signed, when a given contract was signed, and whether the employee lived and worked in California during the relevant time period.
If the touchstone of constitutionality in a conflict-of-laws analysis is fairness, can a statute allowing complete disregard of salient facts related to the dispute survive?
Unfortunately, the Traffic Tech case will not resolve these important constitutional questions, because the Supreme Court denied the writ for certiorari on October 2, 2023. Because the court’s denial did not include any rationale, it is impossible to know why the Supreme Court decided that it did not need to review the case.
Traffic Tech therefore joins the U.S. District Court for the District of New Jersey’s 2020 decision in Howmedica Osteonics Corp. v. DePuy Synthes Sales Inc. and other recent cases touching upon these choice-of-law issues that the Supreme Court has declined to resolve.
These choice-of-law questions therefore remain live and salient for practitioners, employers and employees around the country.
Given the mixed success that California’s worker protections have found in other jurisdictions, particularly when faced with another state’s choice-of-law or venue provision, it is understandable why the California Legislature felt the need to go as far as it has.
Only time will tell, however, whether Section 16600.5 will be considered consistent with the U.S. Constitution, or whether legislators will need to go back to the drawing table to find another way to ensure that California workers receive the benefit of their home state’s laws.
Sarah Tishler is a commercial litigator whose practice focuses on complex business disputes in state and federal courts, including intellectual property, breach of contract, and fraud claims.
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- See: Cal. Labor Code § 925; Colo. Rev. Stat. Ann. § 8-2-113; La. Stat. Ann. § 23:921; Mass. Gen. Laws Ann. Ch. 149, § 24L; Minn. Stat. § 181.988; Mont. Code Ann. § 28-2-708;N.D. Cent. Code Ann. § 9-08-05; Tex. Bus. & Com. Code Ann. § 15.52.; and Wash. Rev. Code Ann. § 49.62.050.
- In addition to these provisions, § 16600.5 also mandates that employers who violate the law commit a civil violation, and affected employees may bring a private action for injunctive relief, the recovery of actual damages, or both.
- Ronnoco Coffee LLC v. Castagna, No. 4:21-CV-00071 JAR, 2021 WL 842599, at *1 (E.D. Mo., March 5, 2021).
- Id. at *2.
- Id. at *5.
- Id. at *3.
- Id. at *6.
- Id. In support, the Ronnoco court cited Howmedica Osteonics Corp. v. Howard, No. CV1919254SDWLDW, 2020 WL 1102494, at *4 (D.N.J. Jan. 17, 2020), report and recommendation adopted, No. 19-19254 (SDW) (LDW), 2020 WL 1082601 (D.N.J. Mar. 5, 2020); Genesys Telecommunications Labs. Inc. v. Morales, No. 119CV00695TWPDML, 2019 WL 5722225, at *7 (S.D. Ind. Nov. 5, 2019); Cherry Creek Mortg. Co. v. Jarboe, No. 18-CV-00462-KLM, 2018 WL 6249887, at *4 (D. Colo. Nov. 29, 2018). While it is accurate that many courts have refused to apply § 925 when another state’s law has been chosen by the parties, the courts are not unanimous. See, e.g., Focus Fin. Partners LLC v. Holsopple, 241 A.3d 784, 821 (Del. Ch. 2020) (applying Delaware conflict of law rules to determine that § 925 governed the case, and therefore invalidated the Delaware forum selection and choice- of-law provisions in the restrictive covenant agreement); C.H. Robinson Worldwide Inc. v. Traffic Tech Inc., No. CV 19-902 (MJD/DTS), 2021 WL 4307012, at *1 (D. Minn. Sept. 22, 2021) (as discussed below, this case was reversed in relevant part by the Eighth Circuit, and is on certiorari before the United States Supreme Court); Oxford Glob. Res. LLC v. Hernandez, 480 Mass. 462, 472 (2018) (affirming order of dismissal for forum non conveniens despite a forum selection clause selecting Massachusetts, because it was contrary to California’s fundamental public policy, and California had a materially greater interest in the dispute).
- See Ministers & Missionaries Benefit Bd. v. Snow, 26 N.Y.3d 466, 476 (2015) (holding that “New York courts should not engage in any conflicts analysis where the parties include a choice-of-law provision in their contract”); see also Capstone Logistics Holdings Inc. v. Navarrete, No. 17-CV-4819 (GBD), 2018 WL 6786338, at *20 (S.D.N.Y. Oct. 25, 2018) (“the courts of New York have refused to consider the public policy of foreign states – including California – to overturn an otherwise valid contractual choice of law provision”) (emphasis in original), aff’d and remanded in part, 796 F. App’x 55 (2d Cir. 2020). To further illustrate the disparate approaches taken by different jurisdictions, consider the Georgia Supreme Court’s recent decision in Motorsports of Conyers LLC v. Burbach, where the court clarified that while Georgia courts must generally honor a contractual choice-of-law provision selecting a foreign law, it may not if doing so is “restrained by the General Assembly” or “contrary to the policy or prejudicial to the interests of this state.” 2023 WL 5760197, at *3 (Ga. Sup. Ct. Sept. 6, 2023). Applying this standard, the Motorsports court held that the analysis for foreign choice-of-law provisions with respect to restrictive covenants begins by asking whether the restrictive covenant comports with Georgia’s restrictive covenant statute. Id. at *7. The Motorsports court vacated the judgment, and reversed and remanded the case back to the trial court to apply the standard it articulated. Id. at *8.
- While New York state and federal courts apply the general rule that a forum selection clause confers personal jurisdiction over a defendant (see, e.g., D.H. Blair & Co. v.Gottdiener, 462 F.3d 95, 103 (2d Cir. 2006)), they also are exacting in their requirements that a forum selection clause be unambiguous to be enforceable. For example, the Eastern District of New York deemed a forum selection clause ambiguous and unenforceable, and therefore found no personal jurisdiction, when the clause in question provided “This Agreement shall be governed by, construed and enforced, at the sole election of the company at any court.” PowerDsine Inc. v. Broadcom Corp., No. 07CV2490(SJF)(WDW), 2008 WL 268808, at *4 (E.D.N.Y. Jan. 29, 2008) (granting motion to dismiss in part for lack of personal jurisdiction). The court’s close analysis of the contractual language only underscores the importance of a well-drafted forum selection clause.
- Petition for Writ of Certiorari, Traffic Tech, Inc. v. C.H. Robinson Worldwide Inc., No. 23- 70 (July 10, 2023) (hereinafter “Petition”).
- C.H. Robinson Worldwide Inc. v. Traffic Tech Inc., 60 F.4th 1144, 1146-47 (8th Cir. 2023).
- C.H. Robinson Worldwide Inc. v. Traffic Tech Inc., No. CV 19-902 (MJD/DTS), 2021 WL 4307012, at *1 (D. Minn. Sept. 22, 2021), aff’d in part, rev’d in part and remanded, 60 F.4th 1144 (8th Cir. 2023).
- Id. at *5.
- Id. at *5-10.
- C.H. Robinson Worldwide, 60 F.4th at 1148 (internal quotation marks and citation omitted). Note that this case was decided before Minnesota changed its law to (prospectively) prohibit noncompete agreements. See Minn. Stat. § 181.988.
- Pet. at 10.
- (Pet. at 11.),
- See Pet. at 12-13.
- Pet. at 19.
- Pet. at 19, quotingPhillips Petroleum Co. v. Shutts, 472 U.S. 797, 818 (1985) (internal quotation marks and citation omitted).
- 449 U.S. 302 (1981).
- Pet. at 24-25, quoting Allstate Ins. Co. v. Hague, 449 U.S. 302, 327 (1981).
- Petition for Writ of Certiorari, Howmedica Osteonics Corp. v. DePuy Synthes Sales Inc., No. 22-55126 (Sept. 14, 2022), petition for writ of certiorari denied (Dec. 12, 2022). For further discussion of the Howmedica cases, see Sarah Tishler, Law360, Minn. Noncompete Ban May Add to Nat’l Venue Choice Tangle (July 20, 2023), available at https://www.law360.com/articles/1696897.