Good News For Employers Wanting To Avoid Expat Lawsuits In Foreign Courts

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A recent U.S. appeals court decision provides some helpful guidance to employers seeking to avoid the application of foreign laws to their expatriate employees. In 3D/International, Incorporated, et al. v. Joseph F. Romano, an expat employee had sued his former U.S.-based employer in Mexican labor court, despite having signed a contract that waived his right to do so and that provided for at-will employment under Texas law. His employer then sought to enforce the contract in the United States.

The U.S. Court of Appeals for the Fifth Circuit held that the contract contained a valid choice of Texas law and that despite substantial links to Mexico (where the expat employee was assigned), the employee’s employment had a more significant legal relationship with Texas. In reaching this decision, the Court examined various factors, including where the contract was entered into, the place of negotiation, the place of performance, the subject matter of the contract, and the domicile, residence, nationality, place of incorporation, and place of business of the parties. The Court concluded that, on balance, the weight of factors in this case tipped towards Texas. Additionally, the Court held that Mexico did not have a materially greater interest in enforceability of its labor laws. As a result, the employer could enforce the parties’ choice of at-will employment under Texas law.

Slightly different facts could have yielded a different result. In Romano, the Fifth Circuit considered the following facts: (i) the final signature on the contract was by a company representative located in Texas at the time of signing; (ii) much of the negotiation over the contract was performed in the United States rather than Mexico; (iii) although the employee performed his work mostly in Mexico, the company’s performance of the contract (i.e., paying salary and providing benefits) was by the company’s Texas-based payroll department; and (iv) the employee was a U.S. citizen (although on temporary assignment in Mexico) and the company was headquartered in Texas. The Court concluded that both Texas and Mexico had a significant relationship with the parties and the transaction, but the expat employee was not able to meet the legal test that Mexico had a more significant relationship that was sufficient to overcome the parties’ express choice of Texas law in the contract.

The Fifth Circuit also concluded that Mexico did not have a “materially greater” interest in enforcing its labor laws over Texas’s interest in the enforceability of at-will employment relationships. However, the decision leaves open the possibility that in other circumstances (such as in the context of enforcement of a non-compete covenant), a court might conclude that a foreign jurisdiction does have a materially greater interest in determining public policy within its own borders.

U.S.-based employers (at least those within the jurisdiction of the Fifth Circuit – Texas, Louisiana, and Mississippi) should structure their expatriate arrangements with this decision in mind. Although this might not stop an employee on temporary assignment abroad from suing his former employer in a foreign court, the company could have potential recourse in U.S. courts that either dissuades the employee from pursuing the foreign litigation or allows the employer to seek damages and costs if such claims proceed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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