California’s Hostility To Non-Compete Agreements Does Not Vitiate Forum Selection Clause

In numerous posts, I’ve discussed California’s policy against covenants not to compete as mandated by Business & Professions Code Section 16600. From a different, more positive perspective, California could be characterized as having a strong policy in favor of employee mobility. However Section 16600 may be characterized, it cannot be gainsaid that it’s very tough to get a California court to enforce a covenant not to compete unless a statutory exception can be found.

The plaintiff in Hartstein v. Rembrandt IP Solutions, LLC, 2012 U.S. Dist. LEXIS 105984 (July 30, 2012) apparently held the same view. As an employee of the defendant, the plaintiff signed an employment agreement that prohibited him from “directly or indirectly working for a competitor of Defendant for a period of one year from the termination of his employment” without the consent. The employment agreement also included a choice of forum clause pursuant to which the plaintiff agreed to “submit to the exclusive jurisdiction of the state courts located in Montgomery County, Pennsylvania and to the Federal courts located in Philadelphia, Pennsylvania as to all actions and proceedings relating in any way to this Agreement and/or [Plaintiff]‘s relationship with [Defendant].”

After resigning and becoming employed by a competitor, the plaintiff filed suit in California Superior Court for a declaration that the non-compete provision is invalid and contrary to Section 16600. The defendant removed the case to federal district court in the Northern District of California on the basis of diversity and then sought dismissal pursuant to FRCP Rule 12(b)(3) for improper venue based on the forum selection clause. The plaintiff opposed based on the following reasoning:

  • Plaintiff’s case is “sure to succeed” in California because California law disfavors covenants not to compete.
  • On the other hand, if the Court enforces the forum selection clause and the case proceeds in Pennsylvania, then Plaintiff is likely to lose because Pennsylvania courts generally uphold covenants not to compete.
  • Thus, enforcing the forum selection clause “would deprive [Plaintiff] of the protection of his own jurisdiction’s laws and remedies”.

Judge Samuel Conti ruled that because this case was based on diversity jurisdiction federal law governs the analysis of the effect and scope of the forum selection clause. Citing Jones v. GNC Franchising, Inc., 211 F.3d 495, 497 (9th Cir. 2000). He then upheld the Pennsylvania choice of forum because the plaintiff’s argument did not challenge the reasonableness of the forum selection clause itself, only the reasonableness of its effect.