US Supreme Court | Beck Reed Riden LLP

Late last year, the Supreme Court denied certiorari in Howmedica Osteonics Corp. v. DePuy Synthes Sales, Inc., which was brought to the Supreme Court for review from an opinion of the Ninth Circuit Court of Appeals. 28 F.4th 956 (9th Cir. 2022). At the heart of Howmedica (as explained in a previous article, here) was the classic Erie law school hypothetical – does federal or state law control in federal court when deciding if a party’s contractual forum selection clause preempts a state statutory forum selection mandate?

o briefly summarize the Howmedica case: A former sales representative for Howmedica had an employment agreement containing a New Jersey forum selection and choice of law provision, as well as noncompete and nonsolicitation clauses. He ultimately resigned and went to work for a competitor. When Howmedica attempted to enforce the restrictive covenants, the former employee asserted that the forum selection and choice of law clauses were void under California Labor Code § 925, because he was a California resident.

The former employee filed a declaratory judgment action in the Central District of California, asking the court to declare those provisions void. Howmedica moved to transfer venue to the District of New Jersey under 28 U.S.C. § 1404(a). The district court denied the motion, holding that state, not federal, law governed the validity of a forum selection clause in a contract, and that the forum selection clause was therefore invalid and unenforceable. The Ninth Circuit agreed, and held that § 1404(a) and Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), “do not broadly preempt all state laws controlling how parties may agree to or void a forum-selection clause.” Howmedica then petitioned the Supreme Court for certiorari review.

y applying state law to decide the validity of a forum selection clause, the Ninth Circuit joined the Seventh Circuit in the minority on this issue. See, e.g., Jackson v. Payday Fin., LLC, 764 F.3d 765, 774 (7^th Cir. 2014). The Second, Third,[1] Fourth, Fifth, Sixth, Tenth, Eleventh, and D.C. Circuits have all gone the other way—they hold that federal law as pronounced in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), applies to determine the validity and enforceability of forum selection clauses.

Despite the circuit split, the Supreme Court denied Howmedica’s petition for certiorari on December 12, 2022. This means that in practical terms, significant uncertainty remains with respect to how contractual forum selection clauses will be treated in the face of the increasing number of state statutes that mandate a given forum for particular subjects, such as employment restrictive covenants.

But, the case law is also far from uniform on a multitude of subsidiary issues. For example, courts have come to opposite conclusions on whether a given state’s statutory forum selection mandate (such as in the Massachusetts Noncompetition Agreement Act (“MNAA”)) in and of itself demonstrates that state’s clear public policy for the purposes of deciding a motion for transfer. In Hilb Grp. of New England, LLC v. LePage, for example, the Eastern District of Virginia held that “no Massachusetts court has held that the Massachusetts Noncompete Agreement Act [which mandates that all cases involving Massachusetts residents must take place in Massachusetts] manifests the state’s strong public policy. Thus, the enforcement of the Agreement’s forum selection clause would not go against a strong public policy of Massachusetts.” No. 3:21-cv-757, 2022 WL 1538583, at *4 (E.D. Va. May 16,2022).

n contrast, the Delaware Chancery Court came to the opposite conclusion regarding whether a statute demonstrates a state’s public policy. In AG Res. Holdings, LLC v. Terral, the Delaware Chancery Court held that “[t]he Louisiana [forum selection] laws cited above are clear pronouncements by the Louisiana legislature regarding its public policy on matters of employment and competition. Under the circumstances, Louisiana’s interests must be respected and enforced.” No. CV 2020-0850-JRS, 2021 WL 486831, at *5 (Del. Ch. Feb. 10, 2021). Idaho provides another example. Idaho Code § 29-110(1) states that it is against Idaho public policy for a contract to restrict a party’s ability to enforce its rights in Idaho courts. Idaho courts have interpreted this statute as evidence of the state’s “strong public policy” against forum selection clauses that mandate proceedings outside of Idaho. See, e.g., Off-Spec Sols., LLC v. Transportation Invs., LLC, 168 Idaho 734, 739, 487 P.3d 326, 331 (2021); see also Gemini Technologies, Inc. v. Smith & Wesson, Corp., 931 F.3d 911, at 915-17 (9th Cir. 2020).

This thorny issue will continue to cause uncertainty for employers operating in multiple states, as well as employers whose workforce is spread out across more than one state. Without clear guidance from the Supreme Court, practitioners must continue to be sensitive to the ever-changing landscape of state laws and the judicial decisions interpreting those laws, in order to understand where a case may eventually be heard, and what laws may apply to the dispute.

Sarah Tishler is the author of this article. Sarah 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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[1] By way of example of the disparate outcomes in different jurisdictions, analyzing the very same forum selection clause, in the very same employment contract at issue, the District of New Jersey upheld the forum selection clause, and rejected arguments that California Labor Code § 925 invalidated it. Howmedica Osteonics Corp. v. Howard, 2020 WL 1102494, at *3 (D.N.J. Jan. 17, 2020), report and recommendation adopted, 2020 WL 1082601, at *1 (D.N.J. Mar. 5, 2020). Same facts—opposite outcome.

Essential to the drafting of any robust employment agreement, and indeed, nearly all modern contracts, is a forum selection clause that governs that agreement. Forum selection clauses are thought to provide the parties to a contract with certainty about where any disputes arising from that contract will be heard; they are presumed to avoid congesting the courts with disputes over venue, so the parties may head to the merits of a case. In general, unless there are obvious defects with a contract’s validity, courts will honor the agreement on venue that the parties reached and memorialized in the contract.

ut what happens when a state passes a law that expressly bans contractual forum selection clauses that would remove a case from that state’s jurisdiction? This type of law is becoming increasingly common among states that view non-compete clauses and other restrictive covenants with suspicion (or outright hostility).

For example, Massachusetts’ Noncompetition Agreement Act provides that “[a]ll civil actions relating to employee noncompetition agreements subject to this section shall be brought in the county where the employee resides or, if mutually agreed upon by the employer and employee, in Suffolk county . . .” Mass. General Laws c.149 § 24L(f).

California is another example. California Labor Code Section 925 provides: “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 …:[¶] (1) Require the employee to adjudicate outside of California a claim arising in California.” (§ 925, subd. (a).) “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.” (§ 925, subd. (b).)

A classic Erie law school exam hypothetical presents itself: in the event that an employee is a California resident, and signs an employment agreement with a company that contains a forum selection clause choosing New Jersey, where will the parties be ordered to litigate if the company sues the (now former) employee when he quits and starts working for a competitor, in direct violation of his employment agreement?

his is the exact scenario before the Supreme Court in Howmedica Osteonics Corp. v. DePuy Synthes Sales, Inc., on certiorari from an opinion of the Ninth Circuit Court of Appeals. 28 F.4th 956 (9th Cir. 2022). In that case, Jonathan Waber was a sales representative for Howmedica, and signed a standard employment agreement with the company, containing a New Jersey forum selection and choice of law provision, as well as non-compete and non-solicitation clauses that prevented former employees from competing, soliciting, and servicing for one year after their departure. Mr. Waber ultimately resigned from Howmedica, and accepted a position with DePuy Synthes Sales. When Howmedica attempted to enforce the restrictive covenants against Mr. Waber, his attorney responded by asserting that the forum selection and choice of law clauses were void under California Labor Code § 925. Communication between the parties broke down, and litigation ensued.

After Mr. Waber filed a declaratory judgment action in the Central District of California, asking the court to declare those provisions void, the petitioner moved to transfer venue to the District of New Jersey under 28 U.S.C. § 1404(a). The district court denied the motion, holding that state, not federal, law governed the validity of a forum selection clause in a contract. Deeming the forum selection clause invalid, and therefore unenforceable, the court assigned no weight to the forum selection clause when evaluating the transfer factors. The Ninth Circuit affirmed, holding that § 1404(a) and Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988) “do not broadly preempt all state laws controlling how parties may agree to or void a forum-selection clause.”

In so doing, the Ninth Circuit joined the Seventh Circuit in the minority view that state law, not federal judge-made law, controls the validity of a forum selection clause in a case sitting in diversity in federal court. The Second, Third, Fourth, Fifth, Sixth, Tenth, Eleventh, and D.C. Circuits have all gone the other way—they hold that the issue is procedural, rather than substantive, and that federal law as pronounced in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) is properly applied to determine the validity, as well as the enforceability, of forum selection clauses.

The circuit split on this important issue is clear, as are the implications for its resolution. To take one example of the disparate outcomes in different jurisdictions, analyzing the very same forum selection clause, in the very same employment contract at issue, the District of New Jersey upheld the forum selection clause, and rejected arguments that California Labor Code § 925 invalidated it. Howmedica Osteonics Corp. v. Howard, 2020 WL 1102494, at *3 (D.N.J. Jan. 17, 2020), report and recommendation adopted, 2020 WL 1082601, at *1 (D.N.J. Mar. 5, 2020). Same facts—opposite outcome.

The Supreme Court has yet to announce whether it will grant certiorari for this case. While Howmedica may not spark the same headline news as other cases before the Supreme Court this term, it is definitely one to watch for practitioners in the labor and employment space.

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