Unlike California, which has a public policy of employee mobility, the majority of other U.S. states do recognize and enforce non-compete agreements and other restrictive covenants. In this blog, we discuss conflicts of law issues that can arise in relation to non-compete agreements.
Enforceability of out-of-state non-competes in California
California courts have addressed various issues that arise from the difference between public policy in California and in other states regarding non-compete agreements and employee mobility. In Application Group, Inc. v. Hunter Group, Inc, an employer based in Maryland bound its Maryland-resident employee to a non-compete agreement, but the validity of the agreement came into question when the employee subsequently sought employment in California. The court in Hunter ruled that the non-compete agreement, though valid in Maryland, can be scrutinized under California law’s policy towards restrictive covenants once the employee wishes to take employment in California. As a result, the agreement was declared void and unenforceable.
Choice of law and forum
In drafting employment agreements with restrictive covenants for out-of-state employees, businesses could consider placing the agreement under the law and courts of a state with a strong pro-enforcement policy concerning non-compete clauses. However, this creates a risk that the agreement may be unenforceable in California.
Race to the courthouse
The divergence between states in enforcing non-compete covenants can give rise to a lawsuit filing race between the former employer outside of California, and the employee in California. In Advanced Bionics Corp v Medtronic, a Medtronic employee based in Minnesota left to work for a competitor in California, although his employment agreement stipulated that he could not work for a competitor for two years after leaving Medtronic and that the contract was governed by Minnesota law. The employee and their new employer sought to have the California courts declare the contract to be unenforceable, while Medtronic sought proceedings in a Minnesota court. The Supreme Court of California ruled that an action in a California court could continue alongside an action in Minnesota until Medtronic could demonstrate that the parties were bound by a Minnesota judgment.
The race to file suit creates the potential for conflicting rulings from two different states. However, the court in Advanced Bionics did not see this as sufficient reason to issue an anti-suit injunction against Medtronic that would have prevented Medtronic from filing suit in Minnesota.